By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
A most unusual thing happened in Europe this week. In a rare climb down, Angela Merkel’s government decided not to push the European Commission to impose a punitive fine on Portugal and Spain for their persistent failure to comply with their budget deficit targets, leading one Eurogroup minister to declare that the euro zone’s Stability Pact is “dead.”
Of Europe’s 27 commissioners, only four voted in favor of applying the fines; the other 23 voted against. According to El País, the deciding factor in the decision was an impromptu phone call from German finance minister Wolfgang Schäuble to some of the more conservative commissioners, giving them the green light to forego the fine.
The U-turn offers Spanish and Portuguese taxpayers a brief but welcome respite from Troika-enforced fauxterity. As we previously pointed out, if the Commission had imposed the fine, it would not have been paid by the politicians who failed to play by the rules agreed upon in Brussels; it would have been paid by the citizenry who are already suffering the consequences of the recession that helped cause the deficits.
But does this rare act of benevolence from Germany represent a genuine shift in policy toward the Eurozone’s Club Med members or is it merely an act of political expedience?
Naturally, Schäuble and Juncker would much prefer Mariano Rajoy, a man cut from pretty much the same ideological cloth as themselves, to stay in power. Spain has been an important ally of Germany under Rajoy’s charge and the support of his party was essential in propelling Juncker into the European Commission’s top spot. What’s more, if Rajoy does eventually form a government, a new round of pre-ordained fauxterity will quickly kick in.
But there are also signs that Germany may be beginning to marginally soften its stance on austerity, prompting rating agency Fitch to lament Europe’s abandonment, once again, of fiscal discipline and economic reforms.
Merkel’s government seems to have realized that for the European project to have any kind of future in a post-Brexit world, it will have to offer a little more carrot and a little less stick. If it doesn’t, the single currency that enables German manufacturers to export at a discount rate all over the world will eventually crumble under the weight of its own contradictions.
“The problem is this,” warns U.S. rating agency Standard & Poor. “The EU, as it is currently constructed and operates, doesn’t embody a coherent ‘pooling’ of the various dimensions of nation-state sovereignty, and therefore it’s unsustainable in its current form.”
Put simply, the EU is a half-way house with too much democracy and nothing in the way of transfer union.
“There are too many moving parts in the electoral politics of 28 nation states, and too many conceivable random-like events that could push political and economic developments in one direction or another, with impossible-to-predict consequences and timelines,” the agency added.
The perfect case in point is Italy’s banking crisis. If the country’s struggling banks are not saved with a combination of public and private money — a process that, to all intents and purposes, began on Friday with the announcement of Monte dei Paschi’s suspension of the ECB’s stress test as well as a €5 billion capital expansion later this year — the resulting carnage could unleash not only a tsunami of financial contagion but also an unstoppable groundswell of political opposition to the EU.
For a taste of just how disastrous the political fallout would be for Italy’s embattled premier, Matteo Renzi, here’s an excerpt from a furious tirade given by Italian financial journalist Paolo Barnard on prime-time TV, addressing Renzi directly:
“You went to meet Mrs. Merkel to ask for a minor public funded bail-out of Italian banks and you got a sharp NO. But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money?
“Banks, that is, with holes in their balance sheets visible from the Moon. Germany bailed them out to the tune of 704 billion euros. It was all paid for by European taxpayers’ money, public funds that is.
“It was done through the EU Commission of Mr Barroso and by Mr Mario Draghi at the ECB. Didn’t you know that Mr Renzi? Couldn’t you have barked this right into Ms Merkel’s face?”
Barnard rounded off his rant with a rallying call for Italians to follow the UK’s example and demand an exit from the EU — a prospect that should be taken very seriously given that one of the manifesto pledges of Italy’s rising opposition party, the 5-Star Movement, is to call a referendum on Italy’s membership of the euro.
Such a vote would be impossible since the Italian constitution expressly forbids referendums on international treaties such as those that hold the EU together. But as Reuters reports, Matteo Salvini, the leader of the right-wing Northern League, a member of the opposition center-right, and Beppe Grillo, founder of the 5-Star Movement, have vowed to pursue a legislative change to allow an ad-hoc exception to the Italian constitution.
Whether or not a referendum on the euro takes place, one thing that’s clear is that a post-Renzi Italy will be a much more difficult, unpredictable force to deal with than the current Renzi-governed Italy. And if Italy ever did decide to leave the Union, whether in an orderly or disorderly fashion, it would be the end of the road for the European project.
For that reason alone, the Commission and Germany will almost certainly end up granting further concessions to Italy and its Southern European neighbors, including a taxpayer-funded rescue of MPS. It may even include a bail-out top-up for Portugal’s crumbling financial system, which was left out of last week’s stress tests.
The challenge for Merkel and other leaders of core euro zone nations will be trying to persuade their already disgruntled voters of the need for increased solidarity with their struggling neighbors to the South. That may well be a bridge too far. By Don Quijones, Raging Bull-Shit.
There’s a pervasive sense of inevitability to Italy’s banking crisis. Read… Contagion from Italy’s Bank Meltdown Spreads