I’ve spoken previously that apart from the economic and social fallout from the European financial crisis, the other major issue I see is the loss of political capital on both sides of the economic divide.
Obvious examples are Catalonia where the economic crisis has opened long festering wounds, and Italy where the failing economy has the potential to re-introduce political uncertainty. The most extreme case, however, is surely Greece where Golden Dawn continues to rise in popularity at the expense of other parties, and there is certainly more to come as the Greek parliament votes on an additional €13.5bn in cuts against an increasingly farcical outlook. Greece now faces another three days of anti-austerity strikes which is again counter-productive to all involved.
What we’ve also seen is what appears to be a loss of political will in creditor nations to support further emergency action by the ECB. This has forced Mario Draghi to front national parliaments to explain his reserve bank’s operations. The trust in the bank will certainly be tested in the coming week given what could be a major error in procedure in regards to Spain:
The European Central Bank has launched an internal investigation into whether it broke its own rules and lent money to Spanish banks on terms far more generous than those offered to Irish banks.
The ECB inquiry relates to the collateral received in exchange for nearly €17 billion worth of loans.
Spanish banks are reported to have offered collateral that the ECB accepted as being more credit-worthy than it actually was and so offered the Spanish banks a preferential discount – effectively a cheaper loan.
An ECB spokeswoman confirmed the collateral examination following a report in German newspaper Welt am Sonntag yesterday, which revealed the Spanish banks should have received the same discount as Irish banks.
The newspaper said that if they had been, the affected banks could have had to produce up to €16.6bn more in collateral.
Up until now, the northern creditors of Europe have been able to state to their citizens that, although liabilities are amassing, no realisable losses have occurred. Greece and Spain, and in some regard Italy, therefore present significant political problems for creditor nations as it becomes obvious to their citizens that real losses are inevitable. With an election year ahead in Germany this sets up an environment of a different kind; one in which the major issue is the loss of political will to do anything at all. From El Confidential (via translate):
The president of the Liberal Democratic Party of Germany (FDP), Philipp Rösler, partner in the coalition government headed by Angela Merkel, the Spanish government has warned that his group would vote against any sovereign bailout bill if the chancellor dare raise a proposal of this nature before the Bundestag. The German Parliament is then closed and bolted to Spain because the FDP has 93 seats that are key to settling a new financial assistance program in any country of the European periphery.
The role of occasional companion Merkel is broadly discussed in the framework of German policy and accommodated Euroscepticism has earned a strong loss of influence in their country. However, Rösler admonitions have served to sharpen the ear of Rajoy, who has gotten the message and is primed to rule out publicly in Parliament to address the possibility of a new assistance program for the remainder of the year. Chief of Executive considers that the rescue should never be an end but a means to ensure the financing of the Spanish economy and debt restructuring, which perhaps can be achieved without shaming Merkel in Germany.
Which brings me back to Greece, where I have previously stated that for political reasons I suspect they will be granted more time and just enough additional money to continue to enact the same failing plan.
Angela Merkel made the comment over the weekend that the euro crisis has at least another 5 years to run. Given that the current plan obviously isn’t generating economic growth, the number of countries under threat continues to grow, and the ECB’s emergency programs are barely making a dent in the economic retrenchment across the zone, it seems highly optimistic, bordering on delusional, to suggest that this is in anyway realistic.
It might be political palatable to Germans for Europe’s leaders to sit on their hand over the next 12 months, but that certainly isn’t the case for southern Europe.