EU: A financial Union before the fiscal one?
US President Barack Obama is urging Eurozone leaders to act.|EPA/PETE SOUZA
Betting short Eurozone values has become the standard game for world 'money sharks' during the past weeks. Its not only that however.
The Spanish banking chaos and the Greek political problems have prompted all careful asset managers to reduce their exposure to European values. In reality, what was so far a sovereign debt problem for Eurozone's sinner governments, has become a banking confidence issue, threatening the euro area and the world with a new and far worse credit melt down.
The European Banking Authority, which was created last year, is obviously unable to take over and resolve the current transnational frictions between Eurozone banks. What is even more alarming however, has to do with the refusal of the European Central Bank to cooperate in resolving the Spanish crisis. The ECB refused to facilitate the recapitalisation of the ailing Bankia bank and rebuffed the idea of returning to the secondary sovereign debt market to support the Spanish debt by acquiring parts of it. The volume of the Spanish and the Italian sovereign debts and more so the deteriorating market sentiment against Europe has made the ECB very cautious.
What if a new ECB intervention does not manage to change the downwards course in the secondary debt market? With the one trillion of ECB liquidity handed out to Eurozone banks five months ago believed to have been consumed, a failing central bank intervention in the secondary debt market could lead the euro area to uncharted waters. If the ECB's intervention proved impotent to reverse the negative course, the Eurozone could be seen as completely disarmed and open to attacks.
Right now there is no other effective line of defence for Eurozone than the ECB, which is already burdened by the its past interventions in the Greek, Spanish and Italian debt paper and the recent €1 trillion refinancing operation in favour of banks. In view of this dreadful conjuncture the European Commission came up on 30 May with a proposal meant to create a 'Banking Union' in the Eurozone. The idea is for the 17 Eurozone member states banks to share the burden exerted on their Spanish and Italian colleagues.
Once more however, Berlin rejected this idea, on the grounds that it will be the wealthy German financial system to undertake the burden. In reality the new burden on Germany and the other surplus member states would have been only indirect. The Commission's proposal had in its core the direct rescue of the ailing Eurozone banks, at this moment the Spanish ones, by the European Financial Stability Facility and the European Stability Mechanism.
The two rescue mechanisms have already been capitalised with a round sum of €750 billion and their potential involvement in the Spanish banks' save would have created no new immediate needs for their own capitalisation. Germany though appeared once more negative, neutralising in this way the very purposes of the EFSF/ESM creation.
This negative attitude enraged even the Americans and President Barack Obama convened a teleconference with the German Chancellor Angela Merkel, the French President François Hollande and the Italian prime minister Mario Monti. Everybody can imagine what was the subject matter of the conference. It was the same as at the G8 meeting some days ago, when all seven asked Germany to do what ever it takes to save the world from another credit crunch and a new recession. Berlin must have being told that it cannot go on rejoicing its accumulated reserves and let the rest of the Eurozone to fight for its life.
It was very characteristic that the European Commissioner Olie Rehn, usually very critical on Eurozone's sinners, while proposing the creation of this 'Banking Union' left to be understood that Spain could have a time extension of at least one year, in fulfilling its obligations of deficit reduction. It goes without saying that such a gift would be extended also to Greece. In a few minutes Rehn appeared ready to change the agreement with Spain and the entire package for Greece. It was a natural outburst by Rehn against Eurozone's austerity lovers. In any case the present conjuncture in all and every EU market is very unstable and Germany has to decide soon if it wants a united Eurozone or what. Seemingly a positive decision will be soon taken.
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