Wolfgang Schäuble, Germany’s finance minister, has asked officials to prepare a plan in time for a summit of EU leaders on Thursday, according to reports in the German media. The options include either a loan from EU states or some sort of institutional EU response.
The news pushed the euro to $1.38 against the dollar, the strongest one-day rally since the single currency began its nose-dive late last year. Yields on Greek 10-year bonds plummeted 36 basis points to 6.39pc in a matter of hours as speculators scrambled to exit overstretched positions, with synchronised moves for Portuguese, Spanish, and Italian bonds.
Michael Meister, parliamentary chief for Germany’s Christian Democrats, said the crisis could not be allowed to drag on. “Our top priority is the stability of the euro,” he told FT Deutschland. “Should Greece receive help, it will only be under tough conditions and if the Greek government undertakes root-and-branch reforms.”
Germany’s apparent backing for a bail-out comes despite worries that it will lead to the breakdown of fiscal discipline across the Club Med region. It also raises troubling questions of fairness. Ireland has tackled its own crisis by slashing wages and going far beyond any measure so far offered by Greece, yet Dublin has not received help.
Germany’s dramatic shift in policy changes the character of the euro project. It follows weeks of soul-searching in Berlin, and after increasingly loud pleas from Brussels, Paris and southern capitals. The deciding factor was concern that letting Greece fail risked a “Lehman-style” run on Club Med debt, with systemic spill-over across Europe.
German exposure to the region amounts to €43bn in Greece, €47bn in Portugal, €193bn in Ireland, and €240bn in Spain, according to the Bank for International Settlements. German lenders are already vulnerable, with the world’s lowest risk-adjusted capital ratios bar Japan…
Herman Van Rompuy, the EU’s new president, has submitted a text calling for the creation of an “economic government” that shifts responsibility for economic planning from national authorities to the “EU level”.
In a parallel move, Commission chief Jose Barroso said Brussels has treaty powers allowing it to take the reins of economic management. ”
This is a time for boldness. I believe that our economic and social situation demands a radical shift from the status quo. And the new Lisbon Treaty allows this,” he said.
“Economic policy isn’t a national, but a European matter. No modern economy is an island. When a member state doesn’t make reforms, others suffer because of that.”
Yves here. The part of the logic that puzzles me is the “defending the euro” bit. On a purchasing power parity basis, the euro should be substantially cheaper. But that excuse may be a cover for the need to protect German banks and forestall pressure on known shortcomings in EU institutional arrangements. The Rompuy/Barroso statements are at least meant to assure markets that the economic governance issues are on the table, but it remains to be seen how far this discussion gets, since the “no modern economy is an island” argument runs counter to notions of national sovereignity, which is what the imperfect EU mechanisms had tried to finesse.
Update: It looks like the Van Rompy/Barroso/other bailout booster camp is ahead of the real state of play.
It appears (as the Telegraph story indicates) that the initial report of a deal came in FT Deutscheland and was picked up by the Telegraph and Retuers. Reuters has now backtracked on the story (hat tip Ed Harrison):
“Government spokesman Ulrich Wilhelm rejects as unfounded reports citing coalition sources saying a decision for aid for Greece has in effect been made,” a government official quoted him as saying. Reuters had earlier reported a senior German ruling coalition source as saying euro zone countries had decided in principle to help Greece.
And hoisted from comments, Swedish Lex says there are others who are not keen about an EU rescue:
The EU Summit in Brussels on Thursday will at best provide an opportunity to agree on a few pages of blueprint for the future. It is clearly too early to speculate what the text will contain, but I suspect that officials in various cities are working non-stop by now.
The UK and Sweden have, according to the FT at least, signalled that they disapprove of a EU bailout/embryonic economic government mechanism, or whatever, instead preferring the IMF. Thursday’s meeting could be interesting as it could put the euro and non-euro state divde in a new light.
I dimly recall a case during the crisis where the FT jumped the gun on rescue talk and had to retreat.