Financial crisis

It is still two hours before the summit, but it seems that one of Germany’s principal initiatives is already sinking badly: a drive to suspend EU voting rights from countries that violate budget rules.

Jose Manuel Barroso, the European commission president, broke his relative silence of recent days to condemn an idea championed by Angela Merkel, the German chancellor.

“If treaty change is to reduce the rights of member states on voting, I find it unacceptable and frankly speaking it is not realistic,” said Mr Barroso, who has thus far remained quiet on the key questions that will dominate this summit. “It is incompatible with the idea of limited treaty change and it will never be accepted by the unanimity of member states.” Read more

Will Iceland really join the European Union?  I have come to Reykjavik in search of answers.  In one sense, it’s the right time to be here: the skies are white for almost 24 hours a day at this time of year, appearing to throw light on everything.  But in another sense this promises to be a frustrating trip - Iceland itself doesn’t seem to know if it wants to be in the EU or not.

The opinion polls are not good.  After a long period in which a solid majority of about 60 per cent of Icelanders supported EU membership, things have turned upside down in recent months.  Support for EU entry was estimated to be as low as 28 per cent in one recent survey, whilst opposition now runs at about 60 per cent.  If Iceland is serious about joining the EU, it will have to hold a referendum, so these numbers matter.  Right now, however, we are a long way from a referendum – at least two years, and perhaps longer.  Much can change.

Enthusiasm for the EU was high when Iceland’s banking system and currency collapsed in 2008, prompting the introduction of a drastic austerity programme conducted under the beady eye of the International Monetary Fund.  But Iceland’s dispute with the UK and the Netherlands over how to repay British and Dutch savers who lost their money in Icesave, the failed online Icelandic bank, has changed public opinion. Read more

Better late than never.  That is one way of looking at the three-year, €110bn rescue plan for Greece that was announced on Sunday by eurozone governments and the International Monetary Fund.  It took seven months of indecision, bickering and ever-mounting chaos on the bond markets for the eurozone to get there, but in the end it did – and it may just have saved European monetary union as a result.

Looked at in a different light, however, the rescue package does not appear to be such a masterstroke.  For its underlying premises are, first, that there should under no circumstances be a restructuring of Greek government debt, and secondly, that Greece’s troubles are unique to itself and need not be considered in a context of wider eurozone instability.  Both premises are open to question. Read more

With good reason the eurozone’s political leaders have been criticised for reacting too slowly to the Greek sovereign debt crisis.  But what’s new about that?  Slowness often seems to be a defining feature of Europe’s approach to policymaking.

Consider the proposals that are in the air for the creation of a European Monetary Fund to manage Greek-style crises in the future.  There is widespread support for such a fund, ranging from the European Commission to Wolfgang Schäuble, Germany’s centre-right finance minister, and socialists in the European Parliament. Read more

Nothing captures Germany’s anger and frustration with Greece better than the story – if you can call it that – in Tuesday’s Bild, the mass-circulation German tabloid.  “Goodbye, euro. Bild gives the drachma back to the bankrupt Greeks.”  Beneath the headline is a picture of a well-dressed, bespectacled young man, presumably German, handing a wad of drachmas – a defunct currency – to a rather frightened-looking, middle-aged Greek lady.  The message is brutally clear: we Germans don’t want to share the same money as you lot.  Drop out of the eurozone and leave us alone. Read more

You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency.  Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.

This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times.  As it happens, I don’t agree – if by IMF assistance we mean financial help.  The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. Read more

Today’s European Union summit in Brussels will set out the framework for a financial rescue operation for Greece.  This much is clear is from various briefings being given by officials from countries as varied as Austria, Lithuania, Poland and Spain.  But financial markets will have to wait until next week to see the full details of the plan.

The central question is how far Germany has been pushed to swallow its words and offer help for Greece, after weeks of denying that it would do anything of the sort.  Only this morning Otmar Issing, the German former chief economist of the European Central Bank, was telling German television viewers that Greeks enjoyed “one of the most luxurious pensions systems in the world” and it was unreasonable to expect German taxpayers to fund it. Read more

An unambiguous message of solidarity among eurozone states will come from Thursday’s European Union summit in Brussels, but it is still unclear if this will translate into a specific financial rescue plan for Greece.  Debate among governments is continuing.  However, expectations in financial markets have been raised so high over the past 24 hours, what with European Central Bank president Jean-Claude Trichet flying in for the summit from Sydney and officials in Berlin hinting at a German-led rescue, that it would be risky for the EU leaders not to commit themselves to some sort of initiative.

There are various possibilities: bilateral loans from Germany and France, with perhaps Italy and the Netherlands chipping in; an International Monetary Fund-style standby facility, organised among the 16 eurozone countries; or an EU-wide loan, involving a show of support from all 27 member-states.  It is quite likely that the IMF will be asked to continue providing Greece with expert technical advice, but I don’t think the eurozone countries will go further and call on IMF financial resources.  Apart from anything else, there is a fear that the US may raise objections on the grounds that the IMF’s firepower should be reserved for fighting emergencies not in prosperous Europe but in other, more disadvantaged financial hotspots. Read more

Europe’s leaders are getting radical.  On Thursday the presidents, prime ministers and chancellors of the European Union will meet for a day of economic policy discussions in Brussels – but not in their normal location, the marble-and-glass Council of Ministers building, famous for its charmless, disinfected atmosphere and its 24km of headache-inducing corridors.  No, this time they will get together in a nearby building called the Bibliothèque Solvay, which is a pleasant old library rented out for dinners and receptions.

The switch of location was the brainwave of Herman Van Rompuy, the EU’s first full-time president, who thought it would encourage a more creative, informal exchange of views.  He has introduced another innovation: each leader is to be restricted to just one adviser at the talks.  This isn’t a problem for countries with leaders who are masters of economic policy detail.  But others are less happy about the arrangement.  It is whispered that the Italians are swallowing especially hard, wondering what on earth Prime Minister Silvio Berlusconi will say once he’s on his own. Read more

The expression “it never rains but it pours” may seem inappropriate for a Mediterranean country such as Greece.  But it was the phrase that sprang to mind when I heard last week that Greek tax collectors are planning to go on strike in protest at the government’s austerity measures.  Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weaknesses.  How will a tax collectors’ strike help matters?

That said, I do not share the view of German and French government officials who insisted vehemently last week that the solution to Greece’s problems lies almost entirely with the Greeks themselves.  If this were the answer, nothing would be simpler than for the Greeks to roll up their sleeves and get on with a 10-year programe of wage restraint and productivity growth. Read more