Source of picture: Wikipedia
By John Richardson
THE eurozone hasn’t been rescued by the programme of sovereign bond purchases, announced a month ago by Mario Draghi.
Wolfgang Munchau, in this excellent article in the Financial Times, explains why. This article is worth printing out and pinning on your office wall as a reminder that we are in the midst of major upheavals in the global economy that will take many years to resolve.
In summary, he writes that Germany will not after all allow Spain to dump the risk of its banks on to the European Stability Mechanism (ESM) – the eurozone’s rescue fund.
That seems to contradict the June 29 eurozone leaders’ summit statement, which said it was “imperative to break the vicious circle between banks and sovereigns”. It was also not how the Spanish interpreted the deal.
This is how the Germans actually saw the deal:
*First, we do not really want a banking union, but if we have to have it, we would like to limit the remit of the pan-European supervisor to a few large cross-border banks.
*Second, ideally the supervisor should not be the European Central Bank (ECB); if it has to be the ECB, there must be safeguards, stronger than those proposed, to ensure that monetary policy remains independent from the banking supervisor.
*Third, there shall be no joint deposit insurance.
*Fourth, the banking union shall not deal with any legacy risk, only problems that arise in the future. The Spanish bank programme remains a Spanish bank programme.
*Fifth, the ESM should not be able to undertake direct bank recapitalisations until a banking union is fully implemented. This will take many years.
The problem in Germany is politics. Munchau adds: “Germany is not ready for a banking union. Ms Merkel never made a political case for a banking union in Germany.
“All she did was play down the implications. I would counsel readers against falling into the trap of thinking that next year’s German elections will miraculously clear all the hurdles. All the various probable outcomes favour a continuation of the present policy.”
So much for the hope that all that had to happen for the crisis to be resolved was for Spain and/or Greece to ask for a bailout.
Next week we will look at why eurozone austerity policies don’t work.
Meanwhile, realism about the crisis seems to have been reflected in the European Petrochemical Association (EPCA) meeting in Budapest, which finished on Tuesday.
“The mood was very subdued,” said one attendee, which, as my colleague Linda Naylor points out, is hardly surprising given extremely weak demand and extreme oil-price driven price volatility,