Europe's Contradictory Answers to its Crisis (Portfolio)
Video Transcript:
Video Transcript
Two weeks after a summit that promised to bring solutions to the European financial crisis, the European Union has once again revealed its fundamental contradictions. On Tuesday, European Central Bank board member Joerg Asmussen said that Eurozone states need to give up more sovereignty in order to fix the crisis, with Europe’s ESM bailout fund possibly turning into a budget authority further down the road.
This is in line with a German approach to the crisis. Germany’s plan is to create a system where countries have legal limits on how much debt they can issue and Brussels has the power to intervene in national budgets.These long-term solutions actually make a fair amount of sense. A robust and unified budgetary regime is precisely what Europe has lacked and what would be necessary to transfer the resources required to sequester the debt crisis.
But things like this take time and are politically costly. Asmussen’s ideas need to be negotiated and then put into a treaty and ratified. Even in the absolute best-case scenario, that is something that could not take effect before 2015.
Europe’s problems are more immediate. First, budgetary discipline is proving increasingly difficult for EU members. This week, officials from the European Commission and the IMF warned that Portugal may not meet its deficit goals this year. Last month, the EU Commission granted Spain another year to meet its deficit goals.
And then there’s Greece. Evangelos Venizelos, the leader of the socialist Pasok party, said that Greece’s promise to save 11.5 billion euros in the next two years is "nearly impossible." Greece wants the EU to allow a two-year delay on its budgetary goals.
Second, everybody seems to be asking for concessions these days. Ireland wants to renegotiate the 30 billion euros of the so-called promissory notes that were used to bail out its banks. Finland is in turn announcig that Spain had agreed to provide collateral in exchange for its participation in a bailout for the Spanish banks. The Finnish episodes reveal that European integration and solidarity don’t come for free.
In the meantime, Spain’s problems are getting worse. Spanish home prices dropped by 8.3 percent in the second quarter compared to a year ago. As property values drop, not only are homeowners being gutted of creditworthiness, but the banks are pushed that much closer to collapse.
Nonperforming loans in Spanish banks just reached 8.9 percent. This means that the total of non-performing debt is now 155 billion euros – that is 50 percent higher than the size of the Spanish bailout.
Spanish authorities are currently looking at ways to minimize losses for small savers who will be forced to take a hit on certain bonds and shares they bought on the Spanish banks. This could particularly hurt small customers -- many of them retirees who were sold these instruments as savings products. The Spanish economy heavily needs a liquid and active banking sector. Spain relies on its banks for four-fifths of all private credit. The biggest buyers of Spanish bonds are Spanish banks.
Europe is in a race between building a new European legal structure and dealing with the immediate needs of Spain’s banking sector. It’s not a very fair race. The former is measured in years. The latter, probably in months.
