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June 30, 2022

One crucial week

Europe has just had a very agitated week. Like in the last few weeks, the reason was the euro issue, more specifically how to prevent the default of Greece – a country standing on the edge of the precipice and requiring more European financial injections – and the identification of a significant solution to the euro zone crisis. Newspapers or well-known European political or economic commentators’ blog headlines are very telling as to the extremely sensitive character of the decisions made these last few days. On September 30, Martin Wolf was announcing in a ‘Financial Times’ headline that it is time the money printing machine was turned on; Gideon Rachman was wondering on his blog: ‘Could China Save Europe?’ relating how a dinner in Singapore, the week before, ‘mixing Asians and Europeans, financiers and policymakers – the talk was mainly of Greece, Germany and the single currency’ debated whether or not China could save Europe from disaster. ­

In a comment approving of Martin Wolf’s view, on the same disquieting day, under the ‘Defeatism’ headline, Paul Krugman was stating on his blog that ‘The austerians have brought us to the brink of a vast disaster. A recession in Europe looks more likely than not; and the question for the United States is not whether a lost decade is possible, but whether there is any plausible way to avoid one.’ George Soros on the other hand draws up a plan for the prevention of a second major economic depression. In Krugman’s language, ‘the austerians’ are ironically and slightingly called ‘Very Serious People’. The world acclaimed economist makes a dazzling comment on those VSPs: ‘And it has been an awesome spectacle watching the VSPs search, obsessively, for reasons not to fight mass unemployment. Fiscal policy must tighten to appease the invisible bond vigilantes and please the confidence fairy. Interest rates must rise because, well, um, inflation, well, no, low rates cause moral hazard – yes, that must be it. And we’re not (just) talking about ignorant politicians. This stuff has been coming from the European Central Bank, the Organization for Economic Cooperation and Development, the Bank for International Settlements.’ The chasing of decision-makers responsible for this dramatic crisis still in progress is on and apparently the hunters are taking aim at a few big names.

But what actually happened last week that caused such diverse comments (it suffices to just skim through the international press to see just how concerning the financial situation of the European Union has become)?

What actually happened is that, faced with the serious prospect of having Greece default on payments without any urgent measures in place, the German Parliament sanctioned the extension of the European Financial Stability Facility (EPSF) with 523 in favour, 85 opposed and three abstentions. This EPSF extension actually allows for an increase from EUR 250 bln to EUR 440 bln – Germany’s share also growing from EUR 120 bln to EUR 211 bln – of the assets of the mechanism that had been recently set up to manage the terrible slump of Greece, Ireland and Portugal. Even if similar votes are expected in other national parliaments belonging to the euro zone, the tune set by the German legislative is decisive not just because Germany is the main contributor to the fund, but also because it is the biggest economy in Europe and the decision it has just made is going to act as a catalyst for the rest of the states. It comes as indubitable proof of the fact that Germany is today Europe’s number one economic power and that it’s position will make the difference in as far as the future of the continent is concerned. One particular note added by the German MPs makes that even more explicit: any future EFSF decisions will also require the approval of the German Parliament. In conclusion, Europe is moving to Berlin’s clock in its effort to emerge out of the bad crisis it is now in.

Opinions on that historic vote in the German Parliament were very diverse, many experts doubting that the extension was enough for the actual needs of the euro zone. German newspaper ‘Frankfurter Allgemeine Zeitung’ was writing on Friday that ‘The enlarged EFSF is, in the best case, now large enough to assist Greece, Portugal and Ireland. As a result, parliamentarians have already begun talking about how to access even greater sums of money. After all, the EFSF will be authorised to purchase sovereign bonds from Italy, Spain and other euro-zone countries and is supposed to help prop up European banks. Such a sweeping mandate could cost several trillion euros. Merely refinancing the debt of Italy and Spain would require EUR 2.6 trillion (USD 3.5 trillion) in the medium term.’ So Europe is not out of the woods yet and the money needed to emerge safely out of the danger is to be allocated under similar future decisions (the use of those huge amounts is not going to pass without any political consequences in the euro-zone states including Germany).

The Berlin vote was preceded by not so formal statements made on both sides of the Atlantic. When President Obama said during a public event in California that the Europeans’ inactivity was ‘scaring the world’, because they ‘have not fully healed from the crisis back in 2007 and never fully dealt with all the challenges that their banking system faced. It’s now being compounded by what’s happening in Greece’, adding that ‘they’re trying to take responsible actions, but those actions haven’t been quite as quick as they need to be’, last Tuesday received a sour reply from the German finance minister: ‘It’s always easier to give other people advice.’ Which only tells that the Berlin vote managed to avoid, at least for the moment, a large-scale crisis in a global world. However, there is another thing Obama’s remarks tell, namely that there is no more time left for delays, planning, political differences within and outside and that decisions ought to be made right now. From that point of view, what Obama said was quite unprecedented in the transatlantic relations. Despite the acidic answer, on Thursday Berlin demonstrated the American president’s answer had been understood.

The financial discipline of ‘The 27’ and the avoidance of a dramatic separation between ‘The 17’ in the euro-zone and the rest of the EU members were mentioned in Brussels, on Friday, in an interview offered by Commission President Jose Barroso and published by the German press. That most likely announces some dramatic decisions also at a EU level.

However, one crucial question remains: Is what was done last week enough for Europe to come out of the terrible crisis it is in and for the EU to actually have a future?

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