It was not supposed to be like this; once Greece had been bailed out, and European leaders put in place their “shock and awe” €740b package, further bailouts were not thought to be necessary. Long winded statements extolled the virtue of the European Financial Stability Facility, the European Financial Mechanism and the IMF’s helping hand. The huge package’s very existence was supposed to cow the markets into submission.
Oh dear. If that was the plan it didn’t work very well, did it? Instead of calm, we have Ireland about to get up to €90b and everyone wondering whether Portugal is next (with Spain also a potential candidate.)
As we move into the next stage of this crisis (yes, it is a crisis) no number of national political leaders telling us that “their position is different” makes a jot of difference anymore. We heard that from Greece. We heard that from Ireland. I, for one, am tired of hearing politicians say “we don’t need a bailout” until the very last moment when the cry becomes “send us the money.”
But whether the Europeans eventually have to bail out a few more countries, probably is neither here nor there. This is a cake that has been mixed and is baking. It will either explode in the oven and require cleaning up, or it won’t.
Of much greater interest is the acceptance that European institutions were both unprepared and unsuited for this crisis. The Swedish finance minister Anders Borg told me on Quest Means Business “ given that we’ve seem a tsunami of financial uncertainty…I think it’s obvious that we have not built enough strong institutions in Europe to deal with these kind of problems.”
The Bulgarian Finance Minister, Simeon Djankov agrees. “The current crisis and resolution shows, not so much that the euro is in trouble” he said, “but that the European institutions were not ready to deal with this crisis.” Mr. Djankov has a phD in economics and is a former senior economist at the World Bank; we should perhaps listen to what he says.
In short, more leaders are accepting that the European Union institutions are not up to the job.
Firstly there is the European Council. It was here that Angela Merkel initially objected to the Greece bailout. Then, several months later as Ireland was about to blow up, she raised the issue of private bond holders sharing the pain through sharing the cost of the bailouts. In both cases, bad situations became worse.
Negotiating positions between the 27 European countries is tortuous and seems to end up in a compromise fudge that no-one really believes in or worse, that don’t work.
Incidentally it isn’t just in financial matters that the Council is wanting. During the Iceland volcano crisis, Europe’s airspace had been closed for five days before European transportation ministers got together to discuss the problem.
Then there is the European Central Bank. The ECB has now become the ‘lender of only resort’ to distressed countries banks that have been shut out of normal inter-bank market operations. It is the funds from the ECB that have kept Ireland’s banks afloat, and it is the life support of many of Portugal’s banks. President Trichet says that can’t continue. He is right, but why was the situation allowed to develop in the first place?
The ECB sets interest rates for the entire Eurozone: One size fits all. It has to be that way in a single currency area. But this guarantees tensions within the Zone that are political as much as financial. Monetary union without fiscal discipline (let alone fiscal and political union) courts disaster as is now clear. In Ireland’s case everyone was so busy patting themselves on the back at the success of the Celtic Tiger that no-one wondered where the debts lay, and what would happen if it went wrong.
Oh sorry – that should have been the job of the European Commission. The EC has a website that is bursting at the seams with reports, policy papers, press releases and smiling faces. It regularly issues smacks on the wrist for countries that are running large deficits, or unsound economic policies. And that is that. It can’t really do more, because then it becomes an issue for the Council (see three paragraphs up)
Round and round in circles it goes.
In any good business planning for “what if” is a fundamental part of crisis management. Except it seems in European institutions, which always seem to be in denial of the possibility of “worst case scenario”
Even now they are in denial about the potential for Portugal to financially blow up. The Bulgarian finance minister on Quest Means Business said that “some sort of pre-planning is probably a very good idea…especially having in mind that the holidays are coming in a month. “
The long and short of the sorry situation is that having botched two bailouts so far, the EU seems destined to repeat the mistake a third time, unless it makes clear that there is a problem with certain countries and starts dealing with it. It won’t be pretty or pleasant for those countries named and shamed, but the alternative is to continue muddling through, one country at a time.
– End –
Richard Quest is a CNN correspondent based in London, host of the weekday one-hour program “Quest Means Business”. For program highlights and more, go to www.cnn.com/qmb
