Spain

Rajoy is still angered by Spain's snubbing during Mersch's selection earlier this year.

If you thought the long, drawn-out saga of Yves Mersch’s nomination to a seat on the European Central Bank’s powerful executive board could not get any stranger, think again.

The Spanish government this morning informed Herman Van Rompuy, the European Council president, that it objected to the fast-track “written procedure” Van Rompuy had begun in order to get Mersch finally seated in the job. The procedure – which was begun after the European Parliament refused to sign off on the nomination last month – was due to end today, making it possible for Mersch to take the long-empty seat by November 15.

But the Spanish veto means Mersch now can’t go through and the appointment battle, which has dragged on for nearly ten months, will have to be taken up by the EU’s presidents and prime ministers when they summit in Brussels later this month.

The question gripping the Brussels chattering classes now is: Why? Was Madrid trying to fire a warning shot across the bow of the ECB and Berlin, which have been ratcheting up the pressure over the conditions of a long-expected Spanish rescue programme? Senior officials insist the real reason is far more prosaic. 

With the European Commission holding its final summer meeting on Wednesday, Brussels goes on holiday in earnest starting next week, with nothing on the formal EU calendar until a meeting of European affairs ministers in Cyprus on August 29.

But if whispers in the hallways are any indication, veterans of the eurozone crisis remain traumatised by last August, when some inopportune comments by then-Italian prime minister Silvio Berlusconi shook Europe from its summer slumber. Indeed, Maria Fekter, Austria’s gabby finance minister, has already speculated on the need for an emergency August summit.

Herewith, the Brussels Blog posts its completely unscientific odds on which of the eurozone’s smouldering crisis embers could reignite into an out-of-control summer wildfire, forcing cancelled hotel bookings and return trips to Zaventem

Spain's Mendez de Vigo, right, with his Danish counterpart at a Brussels meeting in May.

An otherwise uneventful meeting of 27 European ministers in Brussels was upended Tuesday when Inigo Méndez de Vigo, Spain’s EU minister, issued a statement saying Madrid, Rome and Paris all agreed countries were not doing enough to implement eurozone crisis decisions taken at last month’s high-stakes summit.

The statement (see it here, in Spanish) appeared to be a coordinated attack on Germany, where senior officials have spent weeks sending conflicting messages on what, exactly, was agreed at the summit and when decisions will be implemented – a big deal for Spain, since the measures could eventually mean the eurozone and not the Spanish government will be liable for debt incurred during Spain’s bank bailout.

One problem: there was no three-country agreement. And now Rome and Paris are running away from Méndez de Vigo’s statement as fast as they can. 

Italy's Mario Monti, left, being greeted at the G20 summit by Mexican president Felipe Calderon

When EU leaders agreed last year to give the eurozone’s €440bn rescue fund more powers to deal with a teetering country short of a full-scale bailout, it actually created two separate tools to purchase sovereign bonds of a government finding itself squeezed by the financial markets.

Some officials in northern creditor countries believed the most efficient tool would be using the fund, the European Financial Stability Facility, to purchase bonds on the primary market (when a country auctions them off to investors) rather then on the secondary market (where bonds already being openly traded).

The rationale was simple: By declaring the EFSF was going to move into an auction, perhaps at a pre-agreed price, they would effectively set a floor that would encourage private investors to pile in. Indeed, as one senior official said at the time, the EFSF might not even need to spend a cent; the mere threat of auction intervention might be enough to drive up prices and spark confidence, luring buyers back.

In addition to the prospect of using only very little of the EFSF’s increasingly scarce resources, a primary market intervention also had another political benefit: instead of buying bonds off private investors – in essence, rewarding the bad bets made by bankers and traders – the EFSF money would go directly to the governments selling the bonds.

With the topic of using the EFSF – and its successor, the €500bn European Stability Mechanism – to purchase sovereign bonds back on the table for Spain and Italy, it would seem an opportune time for advocates of a primary market programme to have their say. But there’s a problem: as designed by eurozone officials, it can only come as part of a full-scale bailout, meaning it is virtually impossible for Rome or Madrid to accept one. 

Madrid police stand guard outside Bankia, the troubled Spanish bank, during a protest Saturday.

In talking to senior officials about plans for a Spanish bailout for our story in today’s dead tree edition of the FT, several steered us to the seemingly overlooked bank recaptialisation guidelines for the eurozone’s €440bn rescue fund that were adopted last year.

Those six pages, available for all to see on the website of the rescue fund, the European Financial Stability Facility, make clear European leaders were contemplating exactly the situation Spain now finds itself in: having done the hard work on fiscal reform, but suffering from a teetering banking sector that needs to be recapitalised.

The important thing to note in the current context is that the EFSF guidelines, adopted after more than a year of fighting over whether the fund should be used for bank rescues at all, allow for a very thin layer of conditionality for bailout assistance if the aid goes to financial institutions – notably, it foresees no need for a full-scale “troika” mission of monitors poking around in national budget plans. That’s something the government of Mariano Rajoy has been demanding for weeks. 

Italy's Mario Monti and Spain's Mariano Rajoy chat during a March EU summit in Brussels.

The leaked copy of the Italy “country-specific report” from the European Commission which we got a hold of before its official publication Wednesday contains lots of warnings about tax evasion and the black economy. But with Spain and Greece dominating headlines these days, one thing that stands out from reading the report is that Italy is not Spain or Greece.

Both Spain and Greece are struggling mightily to get their budget deficits under control, and some analysts argue they’re failing because of a “debt spiral” where their governments attempt to close shortfalls by instituting severe austerity measures – thus killing economic growth and causing bigger deficits.

The European Commission report (which we’re posting online here) shows how much better Italy’s situation is when it comes to its budgetary situation. Not only is Italy not dealing with huge deficits like Spain and Greece; last year it actually had a primary budget surplus – in other words, it took in more money than it spent, if you don’t count debt payments.

That’s a significant difference, and may be one of the main reasons Italy appears to be decoupling from Spain, as our friends and rivals over at Reuters noted in a Tweet this morning: the spread between Spanish and Italian 10-year bonds have shifted a pretty dramatic 250 basis points over the course of the year. 

Spain's Mariano Rajoy, after a meeting at the Spanish parliament in Madrid earlier this month

The recent turn in market sentiment against Spain has led to a somewhat unanswerable debate in European policy circles about what, exactly, the markets are worried about: Is it that the new Rajoy government tried to break from tough EU-mandated deficit limits last month…or the fact they eventually agreed to stick to next year’s stringent target?

If Standard & Poor’s downgrade of Spanish debt last night is any indication, it appears the markets are more concerned about the latter than the former.

Most senior EU officials have a different view, arguing that by unilaterally declaring he was going to ignore the EU-mandated 4.4 per cent debt-to-gross domestic target for 2012, prime minister Mariano Rajoy spooked the bond market by signalling Spain had lost its sense of discipline.

But S&P makes a different argument. 

Baltic Sea fisherman. Image by Getty

Has the UK lost its influence in Europe? That has become the conventional wisdom in Brussels after prime minister David Cameron last week spurned France and Germany by refusing to sign up to a new “fiscal compact” to further integrate the bloc’s economies.

A first indication may come over the next 24 hours, during which a group of bleary-eyed ministers will try to close an agreement on the European Union’s annual fisheries quotas. Unlikely as it may seem, the UK is expected to get its way because it has rounded up support from France and Germany.

The December fisheries council is one of Brussels’ quirky annual rites and arguably the world’s ultimate fish market. Working late into the night, European diplomats barter quotas on scores of salt water species – from North Sea cod to the nephrop norvegicus – to piece together a comprehensive agreement governing the fisheries of the world’s biggest seafood consumer.

As my colleague, Andrew Bolger, reported in Thursday’s FT, Scotland’s fishing industry is nervous, thanks to Cameron’s defiance. 

A tram passes the euro sign sculpture in front of the European Central Bank ( ECB) in Frankfurt, Germany. Photographer: Hannelore Foerster/Bloomberg

Welcome to our continuing coverage of the eurozone crisis. All times are London time. By Tom Burgis and John Aglionby on the news desk in London, with contributions from FT correspondents around the world. This post should update automatically ever few minutes, but it may take longer on mobile devices.

The turmoil in the eurozone has taken a troubling turn in recent days, with anxiety spreading from Europe’s periphery to its “core” countries. Even as Italy’s Mario Monti readies his economic agenda to be presented today, investors are looking at France, the Netherlands and Austria with increasing unease and wondering whether the ECB might yet ride to the rescue. Over in Greece, today is the anniversiary of 1973′s mass student protests – with demonstrators once more planning to take to the streets. And the bond markets are showing ever more strain, with today’s Spanish bond auction likely to test sentiment still further. We’ll bring you all the latest as it happens.

 

Moody’s decision to downgrade Spain’s sovereign credit rating from Aa1 to Aa2 was very unwelcome to the Spanish government yesterday, but it may have come as a timely reminder to other European leaders, meeting in Brussels today, that they are still a very long way from solving the sovereign debt crisis. Ever since the beginning of the year, the markets have been willing to give the benefit of the doubt to the European negotiators, believing that the Germans and the French had finally come to the view that some form of fiscal burden sharing was a better alternative, for themselves as well as for the troubled economies, than the risk of sovereign defaults, or worse still the break up of the euro.