The most choreographed move in recent Europe economics finally occurred overnight with Spain requesting a €100bn bailout of its banking system:
Spain formally requested on Monday European aid of up to 100 billion euros for its banks, the Economy Ministry said in a statement.
Spain’s Economy Minister Luis De Guindos said in the letter to Eurogroup chairman Jean-Claude Juncker that the final amount of the financial assistance would be set at a later stage but should be enough to cover all banks’ needs plus an additional security buffer.
He also confirmed his intention to sign a Memorandum of Understanding for the package, which would include full details, by July 9.
As I mentioned in early June, any use of the EFSF or ESM comes with conditions and the wording of the MoU will be very important. Although Mariano Rajoy has attempted to convince his fellow Spaniards that the money will come without conditions I suspect the reality will be quite different. For his part, however, Mr Rajoy is keeping up appearances:
The Spanish government will soon take new measures aimed at stimulating economic growth and creating jobs, Prime Minister Mariano Rajoy said on Monday in a speech to business leaders.
“Soon there will be new economic measures with no objective other than (economic) growth and creating employment,” Rajoy said. He gave no details, but also said Spain was fully committed to cutting its public deficit.
He also said that European leaders, at a summit later this week, should set out a precise calendar for achieving further economic and fiscal integration in the euro zone.
On the back of a rapidly deflating housing bubble, and in the absence of a current account surplus, the Spanish economy continues to deflate. Promising to spur economic growth and employment while promising cuts to government deficits in this environment appears to be a pile of wishful thinking, not that this is new for the Spanish.
This bailout adds another €100bn to the debt of the Spanish sovereign which is already facing €550bn in funding over the next 3 years. Unsurprisingly Spanish yields were up overnight.
Spain was not alone, however, with Cyprus also indicating that it too will need assistance:
Cyprus has told the European authorities that it intends to apply for financial assistance, the fifth eurozone member to do so. It said it needs help to shore up its banks, which are heavily exposed to the Greek economy.
I am sceptical anything will change in the German camp until the weaker economies of Europe are shackled to the fiscal compact, one way or another.
A recent interview from Spiegel with German Finance Minister, Woflgang Schauble, appears to give support for those ideas:
Schäuble: The most important thing is that we create a fiscal union, one in which the nation states give up their jurisdiction in terms of fiscal policy. In addition, the problems of the Spanish financial institutions reveal, once again, that Europe would be better off with a bank union. We need a European supervisory authority, at least over the major lenders, which can then influence the banks directly. Then we can also save them with joint funds.
SPIEGEL: For months, Germany has been under pressure to agree to joint government bonds, the so-called euro bonds. It would certainly be seen as a confidence-building measure if you complied with the wishes of the other European countries.
Schäuble: As long as we don’t have a fiscal union, we cannot assume joint liability for debts.
SPIEGEL: Why are you so uncompromising on this issue?
Schäuble: Because you can’t separate the responsibility for decisions and the liability. This applies to almost all areas, but especially to money. Someone who has the ability to spend money at someone else’s expense will do so. You do it, and so do I. The markets know that. And that’s why they too would not find euro bonds convincing in the end.
In that regard it has been my understanding that Germany was using the crisis to its advantage. If other Eurozone nations were unwilling, or unable, to meet their obligations under the fiscal compact then Germany could simply wait for their economies to weaken to a point were they requested a bailout which would then bind them to similar terms. From that point on, as we now see with Spain, the willingness to give up national sovereignty in return for economic help makes the shift of power to Brussels all that more easy:
SPIEGEL: With all due respect to your vision, is there truly more willingness today among EU member states to give up sovereignty than there was in the 1990s?
Schäuble: The recognition that this is necessary, and the willingness to do so, has certainly grown due to the crisis, and not just in Germany. I would much prefer that we not have so many crises, and particularly not such severe ones. But every crisis also includes the opportunity to recognize what is necessary. That’s what led to the fiscal pact, in which 25 EU countries pledged to improve their fiscal discipline. And that’s also how the new Europe will come about.
I recommend you read the entire interview as it gives you an idea of what we are likely to see from the German camp at this week’s summit. It is also very much in-line with the conclusion of the latest memo from the European commission on the fiscal union:
3. The way forward
Recent years have seen an unprecedented strengthening of coordination of economic and fiscal policies at EU level. This has been accompanied by an expression of solidarity to support financially vulnerable euro area countries through the building-up of the euro area’s firepower in the form of the EFSF, and the ESM (which should be effective in July). The renewed intensification of the sovereign debt crisis demonstrates the need to build further on these achievements, and map out the main steps towards full economic union, to complement and strengthen the existing economic and monetary union, as the European Commission has advocated and implemented in the past years. A fully-fledged economic union would require more decisions taken at European level when it comes to public expenditure, revenues and borrowing, and thereby a higher degree of political integration. This should obviously entail commensurate steps that ensure democratic legitimacy and accountability.
It would appear from this week’s market tensions that a disappointing outcome from the 19th EU summit is likely to be very disruptive to the world’s financial markets. The trouble is that Europe has never been one to make bold leaps of faith as suggested by Schäuble and the EC. Although Europe’s appears to have a vision of its future the outcome is years away. I’m not sure the rest of the world is willing to wait that long.