Subject: SPIEGEL ONLINE - Druckversion - Europe's Neverending Crisis: Can the Euro Still Be Saved?
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Devon Archer" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Curtis Hastings" <[email-masked]>
Date: Mon, 22 Nov 2010 10:25:06 -0500

11/22/2010 11:30 AM
Europe's Neverending Crisis
Can the Euro Still Be Saved?

The countries of the euro zone are hopelessly divided over the  
question of how to save the currency in the long term. Bailouts for  
individual countries like Ireland and Greece can only be a temporary  
solution. Meanwhile, an internal paper drawn up by the German  
government has revealed Berlin's plans for forcing private-sector  
investors to take their share of losses in future crises. By SPIEGEL  
Staff

In the time since European leaders named the Belgian politician Herman  
Van Rompuy president of the European Council a year ago, the public  
has taken little notice of the reserved native of Belgium's Flanders  
region. But that changed last Tuesday, when Van Rompuy made headlines  
across Europe with a brief remark.

"We all have to work together in order to survive with the euro zone,  
because if we don't survive with the euro zone we will not survive  
with the European Union," Van Rompuy said during a panel discussion.  
With his comments, he expressed what many people in Brussels had been  
thinking but few had dared to say out loud.

As it happens, Van Rompuy would also have preferred not to say what he  
said. Two days later, he claimed that he had been misunderstood. He  
had apparently stuck his neck out too far. But that doesn't change the  
fact that the statement itself was correct.

Euro-zone governments have spent months trying to end the crisis  
facing their common currency, but the danger has not been averted. On  
the contrary, the crisis meetings have returned and billions in  
emergency funds are needed once again. And there is still no end in  
sight to the crisis.

Merely Temporary Relief

European leaders have tried all kinds of measures in the bid to save  
the euro. They approved a bailout program for Greece and a massive  
rescue fund for the entire euro zone, they whipped legislation through  
their parliaments and they expanded the articles of the Lisbon Treaty  
to their legal limits (and beyond, many would argue). The European  
Central Bank (ECB) has even violated an ironclad taboo by buying up  
the bonds of ailing countries in an attempt to stabilize their prices.

But those steps only brought temporary relief, which only lasted until  
the next piece of bad news emerged. Yesterday it was Greece, and now  
it's the sorry state of Irish banks that poses a threat to the common  
currency. Each new report fuels the suspicion that the problems may be  
so pervasive that they can no longer be solved with conventional  
methods and by taking on more and more debt. Fears are growing that  
the crisis could lead to the default of individual countries or  
possibly even the collapse of the euro zone.

A deep divide between two almost irreconcilable camps runs through  
Europe. German Chancellor Angela Merkel heads one camp, consisting of  
the northern European countries. Merkel sees herself as the defender  
of a culture of stability of the sort that Germany has maintained  
since the days of the deutschmark. Her goal is to prevent the monetary  
union from becoming a kind of transfer union, with Germany as paymaster.

The second camp consists of the so-called PIIGS states, which have  
accumulated too much debt in the past and are now hoping for help:  
Portugal, Italy, Ireland, Greece and Spain. They want the thing that  
Merkel wants to prevent: a union in which the strong pay for the weak.  
Europe's institutions are now maneuvering between these two camps.

Causing a Stir

The first act of the current crisis began in the chic French beach  
resort of Deauville in mid-October. To the consternation of their  
allies, Merkel and French President Nicolas Sarkozy announced the end  
of their ambitious goal to enforce a stricter stability pact with  
automatic sanctions for nations that break the deficit rules. In  
return, Sarkozy supported the German idea to assign some of the  
liability for future financial crises to private-sector creditors like  
banks and to accept the possibility of bankruptcy for an insolvent  
country. The 27 heads of state and government approved the deal at the  
European summit in late October.

The plans, and the horror stories about Irish banks, caused a stir in  
the financial markets, pushing up risk premiums for the government  
bonds of all the ailing countries. "Merkel and Sarkozy apparently  
didn't think about the second act," comments Luxembourg Foreign  
Minister Jean Asselborn.

The yields on Irish government bonds rose as high as 8.6 percent at  
times -- 6.2 percentage points higher than the rate Germany pays to  
borrow money. This prompted Irish Prime Minister Brian Cowen to  
angrily note that Merkel's actions were "not helpful."

The German plan to automatically force bondholders to pay up when  
financial aid packages are approved "might seem attractive from a  
theoretical point of view," says ECB executive board member Lorenzo  
Bini Smaghi, but it would "in practice destabilize markets and have  
severe effects on economies in the euro area." It could ultimately  
achieve the opposite of what was intended, says the central banker,  
because "speculators would take advantage of the situation, while many  
small investors would suffer losses."

Responding to the accusation that it triggered the Ireland crisis, the  
government in Berlin said that the German proposal to involve private- 
sector investors has no effect on current market behavior because it  
focuses on the period after 2013. It insists that even government  
bonds purchased today would remain unaffected by any new rules. "In  
fact, this has nothing at all to do with the current debate over  
Ireland," says German Finance Minister Wolfgang Schäuble.

Misjudging Reactions

None of this has reassured the players in the financial markets. Once  
again, the German government was confronted with the realization that  
it cannot take action relating to the euro crisis without taking the  
reactions of investors into account. It misjudged this reaction once  
before, when it opposed financial aid for Greece for so long. In those  
weeks of uncertainty, the risk premiums for Greek government bonds  
continued to rise, while speculators began setting their sights on the  
bonds of the other PIIGS countries.

In the end, the euro-zone countries approved a comprehensive bailout  
package, leaving Chancellor Merkel in a losing position -- and looking  
like she was to blame. Her many adversaries in Europe argued that by  
taking such an uncooperative approach, Merkel made the crisis worse  
and drove up the costs of the bailout. The chancellor justified her  
actions by arguing that if it hadn't been for her tough stance, the  
Greeks would not have agreed to a strict austerity program and the  
involvement of the International Monetary Fund (IMF).

Merkel's reputation in Europe has been battered since then. Many see  
her as a betrayer of European ideals who stubbornly pursues German  
national interests. These critics feel vindicated by recent  
developments.

There is a rising tide of anger directed at the chancellor. Greek  
Prime Minister George Papandreou has criticized Merkel, saying that  
her reform plans could break the backbone of entire countries, while  
the Portuguese finance minister likens her plans to a foul in the game  
of soccer.

Wait-and-See Approach

All this criticism prompted the Germans to avoid taking a leading role  
in the current crisis talks in Brussels. They took a wait-and-see  
approach, even when they were put under pressure, especially by  
Portugal and Spain. Both countries are afraid of being sucked into the  
Irish crisis.

Unlike the Greeks, who implored their fellow Europeans to come to  
their aid, the Irish needed more persuasion. They didn't want the  
Europeans' money, because they fear it could weaken their sovereignty.  
And they argued they didn't need it either, because they won't need to  
borrow money on capital markets until the middle of next year.

This is true in theory. Ireland's problems are not its government  
finances but the balance sheets of its banks. However, the two things  
are closely related, because the country issued a comprehensive  
government guarantee for its banks after the financial crisis --  
without suspecting how big the problem could turn out to be.

There has been a quiet exodus of billions from Ireland in recent  
weeks. Most international investors were no longer willing to lend  
Irish banks as much as a cent. The Irish banks repaid €55 billion ($75  
billion) to their international creditors, mainly German, French and  
British banks, because the corresponding bonds had matured. But those  
creditors took the money and fled from the country. Only government- 
owned banks were still willing to lend money.

By the end of October, the Central Bank of Ireland had extended  
"extraordinary liquidity assistance" in the amount of €20 billion  
without the Irish banks providing the corresponding collateral. Also  
by the end of October, Irish banks had borrowed €130 billion from the  
ECB, which is more than the Greek banks borrowed. ECB experts have  
been hard at work at the Irish Department of Finance since September.

Even though the government has already taken a considerable portion of  
their risks off their hands, Irish banks are still dragging around  
property loans valued at €200 billion, which have not yet been  
adequately written down. Even the reserves of the better financial  
institutions have been used up, and the entire Irish banking system is  
on the verge of collapse.

In internal talks early last week, ECB President Jean-Claude Trichet  
made a far-reaching proposal. To solve the problem once and for all,  
he said, both Ireland and Portugal, which is also in financial  
trouble, ought to be provided with sufficient funds. These ideas went  
over well, especially with smaller member states.

Multi-Billion Bailout for Ireland Announced

A delegation of representatives of the EU, the IMF and the ECB arrived  
in Dublin on Thursday of last week to investigate how big the Irish  
problem really is. At that time, the draft version of a bailout plan  
had already been written.
It included two options. Under the "minor solution," the euro-zone  
stabilization fund would only cover the acute new shortfalls of the  
Irish banks. Under this scenario, the rescue fund would have to  
provide about €45 billion-50 billion, according to estimates made  
before the experts arrived in Dublin. London market insiders even  
feared that the sum could be as high as €60 billion-80 billion.

Many experts in the EU and a few finance ministries recommended a  
"bigger solution," which would involve taking Ireland "completely off  
the market," at least for some time. Otherwise, the proponents of this  
solution argued, the problems could begin all over again in the  
spring, when the government of Prime Minister Cowen will have to  
obtain new money to extend expiring loans. That plan would however  
cost "about €100 billion," said one official, "maybe even a bit more."

The British also indicated they wanted to contribute to the rescue  
package for Ireland. They may not be part of the euro club, but they  
are "good neighbors," said a British government spokesman.

Then, on Sunday, the Irish government announced it had officially  
asked the EU and IMF for help. Europe's finance ministers quickly  
agreed to the aid in a hastily convened telephone conference on Sunday  
evening. It is not yet clear exactly how big the bailout will be, but  
Prime Minister Cowen said it would be less that €100 billion.

On Monday, the British Chancellor George Osborne confirmed that  
Britain had also offered a bilateral loan to Ireland totaling around 7  
billion pounds (€8.2 billion or $11 billion). "Ireland is our very  
closest economic neighbor so I judged it to be in our national  
interest to be part of the international efforts to help the Irish,"  
he told BBC radio.

Reserved Approach

The German government has taken a reserved approach to providing  
financial help for the euro-zone's troubled members. Chancellor Merkel  
is under particularly intense pressure. In addition to public opinion  
in Germany, she has to take the views of the judges on the  
constitutional court and the coalition parties' parliamentary groups  
into account. The Karlsruhe-based constitutional court is currently  
reviewing several constitutional complaints against the billions in  
aid for Greece and the establishment of the European stabilization  
fund, and the number of such complaints could soon rise.

"In the event that Ireland also applies for assistance from the EU  
stabilization fund, we will immediately file a motion for a temporary  
injunction with the constitutional court to prevent the funds from  
being disbursed," said Berlin legal scholar and economics professor  
Markus Kerber ahead of Sunday's announcement.

He is one of the appellants filing a suit against the EU stabilization  
fund in Karlsruhe. If billions are made available for highly indebted  
countries with financial difficulties, the monetary union will turn  
into a transfer union, Kerber argues. In addition, he says, the  
government's approval of the fund violates the property guarantee  
under Germany's constitution, which is known as the Basic Law.  
"Article 14 of the constitution guarantees a secure, stable currency,"  
says Kerber.

Peter Gauweiler, a member of parliament for the conservative Christian  
Social Union (CSU), also has constitutional concerns about aid for  
Ireland, and he believes that the prospects of his suit against the EU  
rescue fund are improving. "If Ireland asks for help from the EU now,  
this will confirm the basic assumption of my constitutional complaint,  
namely that the basis for a secure euro in the Treaty of Maastricht  
has become obsolete," he said recently.

Criticism of Low Corporate Tax Rate

Politicians from the conservative Christian Democrats (CDU/CSU) and  
their coalition partner, the pro-business Free Democratic Party (FDP),  
are also closely watching each step the German government takes in  
Brussels. Markus Ferber, the chairman of the CSU group in the European  
Parliament, wants to tie aid for Ireland to strict conditions. "We  
also managed to obtain tax increases in the case of Greece. The same  
thing has to happen in Ireland," says Ferber. "It is unacceptable if a  
country relies on the solidarity of the community while continuing to  
secure competitive advantages over its benefactors through the use of  
tax dumping."

He is referring to Ireland's low tax policy. Corporations in Ireland  
pay a low corporate tax of 12.5 percent. "If they had our system, they  
would be swimming in money," says economist Hans-Werner Sinn,  
president of the Munich-based Ifo Institute for Economic Research.

The tax question had been the sticking point in the bailout  
negotiations. The tax question is non-negotiable, said the Irish  
government. Without concessions there will be no money, responded  
officials in Brussels.

Tense Situation

Nevertheless, it was clear that there would be a compromise in the  
end, and that Ireland would get help. It is hoped that the bailout  
will bring calm to the financial markets, at least for the time being.  
But what happens after that? Won't the markets' attention turn to  
Portugal next? Not even Portuguese Finance Minister Fernando Teixeira  
dos Santos is willing to rule out that his country could find itself  
in a situation in which it would need the protection of the rescue  
fund. His counterpart at the Foreign Ministry can even imagine  
Portugal being ejected from the euro zone.

The rescue fund was approved to calm the financial markets. Its mere  
existence was expected to reduce tensions to the point that no country  
would actually have to make use of it. Instead, the situation has  
become more and more tense for many countries in the interim.

The European Union and the IMF envisioned a fund comprising €750  
billion to protect their weaker members. This money would be  
sufficient for Ireland and Portugal. But things would become more  
difficult if Spain needed help. This is a situation Europe's  
governments did not anticipate, who reasoned that what should not be  
allowed to happen could not happen.

Apparently they assumed that the problems would be largely resolved by  
the time the rescue fund expires in 2013. It was expected that by then  
the PIIGS countries would have cleaned up their finances and be able  
to borrow money at reasonable rates again. Now the European  
governments must face a different reality, coupled with the question  
of what happens in 2013.

Internal Government Document Outlines Planned Crisis Mechanism

Chancellor Merkel is determined to prevent the rescue fund, in its  
current form, from becoming a permanent solution. She envisions that  
the construct will be replaced with a "permanent crisis management  
mechanism" when it expires in 2013. A plan developed by the German  
Finance Ministry has already been coordinated with the Chancellery,  
the Foreign Ministry and the Economics Ministry. German Finance  
Minister Wolfgang Schäuble intends to present the plans in detail at  
the next meeting of the Euro Group and the council of finance  
ministers in Brussels in early December.
According to a "non-paper" drawn up by the Finance Ministry, "the  
crisis mechanism is designed to allow for a fair balancing of  
interests between the debtor country and bond creditors," so that  
"systemic effects" on financial markets and the monetary union are  
avoided. A non-paper is a document that is so confidential that it  
doesn't really exist.

Change in Payment Terms

According to the Germans' plans, the conditions for all new bonds in  
the euro zone would include a debt restructuring clause as of 2013.  
The goal of the clause is to "make it possible to achieve a legally  
binding change in the payment terms through majority decisions of the  
creditors in the event of the debtor's inability to perform." The  
document lists maturity data extensions, rate reductions and debt  
waivers as measures.

A neutral chief negotiator would mediate between bankrupt countries  
and investors. "This task should be assigned to an inter-governmental  
institution that can also be a provider of financing at the same  
time," the document reads.

The new facility could also provide ailing countries with liquidity  
assistance. The money for the program would come from two sources.  
First, there would be the revenue from the penalties euro-zone  
countries would pay for repeatedly violating the upper deficit limit.  
Second, the euro-zone countries would pay into the fund, with their  
contributions possibly being based on their shares in the ECB.

A condition for the procedure is an analysis of a country's "debt  
capacity" prepared by the European Commission, the ECB and the IMF.  
German government experts are convinced that their plan will be  
successful. "The affected country gets a realistic prospect of quickly  
regaining its reputation and trust," they write, while the creditors  
would receive the chance of "securing a portion of the value of their  
bond."

The drawback of the plan is that it cannot go into full force in 2013,  
because not enough bonds with restructuring clauses will be on the  
market right away. Recognizing this weakness, the government experts  
concede that there would be a transitional period. This would amount  
to a "period of six to eight years, for which transitional solutions  
will have to be found."

Euro Bonds Suggested

The document does not describe what this could look like. In bilateral  
talks, Schäuble is already seeking allies for the plan, such as his  
French counterpart Christine Lagarde. But many countries have  
completely different ideas. Luxembourg Prime Minister Jean-Claude  
Juncker supports the idea of issuing euro bonds. These are government  
bonds whose repayment is not guaranteed by the issuing country but by  
the entire monetary union.

The southern euro-zone countries think this is an excellent idea. The  
Germans and the Austrians are against it. This sort of project would  
penalize those "who are dutifully sorting out their national finances"  
and benefits those "who haven't done their homework," says Austrian  
Finance Minister Josef Pröll.

"When everyone is liable for everyone else, there is very little  
incentive for individual countries to keep their own house in order,"  
warns Christoph Rieger, a bond expert at Germany's Commerzbank. This,  
says Rieger, jeopardizes the currency as a whole.

Indeed, all of the proposals to solve the euro crisis share the same  
problem: They have the potential to make things even worse.

ARMIN MAHLER, PETER MÜLLER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, HANS- 
JÜRGEN SCHLAMP, CHRISTOPH SCHULT, ANNE SEITH

Translated from the German by Christopher Sultan

URL:
http://www.spiegel.de/international/europe/0,1518,730375,00.html
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