Thursday, 27 October 2011

Dazzling numbers obscure real eurozone deal

Another day, another eurozone rescue.

We have, of course, been here before. Today's deal is similarly long on rhetoric and short on detail, but that won't prevent the markets bouncing and the media once again reporting that the crisis is solved.

Yet, in a few weeks time, they will again all realise that the latest 'solution' is far from that at all.

Just as happened back in July, many crucial details of the deal are yet to emerge and have the capacity to cause a rapid unravelling.

How exactly the European Financial Stability Facility will be leveraged from its remaining €250 billion to an extraordinary €1 trillion (£880bn) - whether by the provision of risk insurance or a special purpose investment fund into which countries like China and the Gulf states will be asked to contribute - will not be revealed until the end of next month.

Similarly, will banks be able to find the required extra €106bn in capital? And whether
private investors will actually swap their Greek bonds for those with a 50% repayment reduction also remains to be seen.

According to the BBC's Robert Peston, the agreement of the banks "in principle" to slashing what Greece owes them by half came at the last minute. But yesterday's Irish Times highlights unsurprising scepticism that what is being asked of them with respect to Greece represents "an exceptional and unique solution" and does not set a precedent for what may happen should the difficulties in other countries worsen.

Investors could yet decide that the warm words of EU politicians and appointees about Greece being a special case are too wafer thin relative to the economic forces that could yet come to bear on the far bigger economies of Spain or Italy.

Even if the banks go through with the deal, many observers doubt that the resulting reduction of Greece's debt to 120% of GDP by 2020 (ie. the same as Italy's) is in any case going to lighten the country's burden sufficiently to enable a rebalancing of its economy.

Economic union

A bigger problem in how today's deal is being reported is how the media are once again too hypnotised by the glittering numbers to look at the small print.

What many are missing this time are the details under the summit conclusion headings (pdf) 'Economic and fiscal co-ordination and surveillance', 'Governance structure of the euro area' and 'Further integration' which cover the EU's growing
power-grab over taxation and how euro members run their economies.

Back in July, commentators made the same mistake. A far greater focus was applied to the new repayment terms for Greece and the possibility of increased funds for the European Financial Stability Facility (EFSF) than on the real gem of the package for EU leaders.

Namely, the granting of permission for EFSF money, guaranteed by eurozone members, to be used to recapitalise the worst-afflicted banks in particular countries - a responsibility that would normally have to be fulfilled by national treasuries.

Obscured integration

Again today, dazzled by completely unqualified numbers, the media are overlooking the far more significant passages of the latest deal that relate to deepening economic union, greater EU powers to interfere in the budgets of member countries and the introduction of EU taxes.

See Paragraph 27a, which says that "for euro Member States in excessive deficit procedure, the Commission and the Council will be enabled to examine national draft budgets and adopt an opinion on them before their adoption by relevant national parliaments".

Far from applying to one or two financially irresponsible cases, 13 of the 17 euro member countries are currently in the EU's excessive deficit procedure. So this represents a substantial extension of the influence of the unelected EU Commission over national parliaments with respect to the politically highly sensitive tax and spend policies of euro member countries.

Paragraph 29 goes on to discuss the "Pragmatic co-ordination of tax policies in the euro area" as a "necessary element of stronger economic policy co-ordination" and confirms that "Legislative work on the Commission proposals for a Common Consolidated Corporate Tax Base and for a Financial Transaction Tax is ongoing."

And Paragraph 35 instructs the European Council to bring forward an "interim report" in December 2011 on "strengthening economic convergence within the euro area, improving financial discipline and deepening economic union" with a report on how to implement agreed measures including "the possibility of limited Treaty changes" due by March 2012.

Flaws not fixed

Ultimately, even if today's uncertainties pan out as the EU desires, the reality is that
this latest deal will still not be enough to cement the euro's cracks.

The reason is simple. There is no solution to the eurozone's problems other than for the most indebted countries to break the fixed exchange rate system and leave the euro, to restore competitiveness and growth to their economies. But of course, EU politicians and especially its employees refuse to let go of their flawed single currency project.

While the markets are bringing some realities to bear, the question is for how much longer can Europe's political elite get away with putting off the inevitable crunch, in the process worsening the mess they have created and now flushing almost incomprehensible sums of public money to protect the failing euro?

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