The World from Berlin

Brussels' Decisions 'Will Exacerbate the Crisis'



Greek debt was slashed on Thursday morning in Brussels. But is the crisis over?

The list of measures passed in Brussels on Thursday morning is impressive, with the 50 percent debt haircut for Greece topping the list. But given ongoing concerns over Italian debt, will it be enough? German commentators on Friday are skeptical.

The markets seem convinced. Stock market indexes around the world shot up on Thursday in the wake of the European Union deal to slash Greek debt by 50 percent and boost the euro backstop fund to €1 trillion. And the rally has continued on Friday, with banks leading the charge.

The euro-zone, it would seem, has managed to convince investors that it might be on the path to solving the common currency area's debt problems after all. In addition to the Greek debt haircut, the 17 euro-zone members also agreed on a requirement that European banks increase their core capital ratios to 9 percent, a move that will, it is hoped, help buffer them against the hefty write downs of Greek debt that some will have to swallow.

In addition, the EFSF is to be boosted, transforming the fund with a current lending capacity of €440 billion into one with firepower worth €1 trillion. At that size, it is hoped, investors will no longer be overly concerned about investing in euro-zone sovereign bonds, particularly those from larger area economies like Italy and Spain.

Still, despite the apparent investor euphoria over the deal, there are, for the moment, precious few details about how exactly the new EFSF fund will work. There are two competing models -- one involving an insurance scheme guaranteeing a portion of investments in euro-zone sovereign bonds against loss and another envisioning the creation of an investment fund to attract money from outside the euro zone. But euro-zone leaders won't be making a final decision until November.


'Several Additional Steps'


"The complete lack of details out of the European summit doesn't give investors a great sense of comfort," Fredrik Nerbrand, global head of asset allocation for HSBC, told Reuters.

Likewise disturbing, despite efforts by Chancellor Angela Merkel and French President Nicolas Sarkozy to force Italy to commit to a significant austerity program, markets aren't convinced. Italian Prime Minister Silvio Berlusconi did arrive at the summit with a letter of intent outlining a list of structural reforms he intended to pursue -- including, notably, an increase to the age of retirement in the country -- in an effort to reduce his country's sovereign debt from its current level of almost 120 percent of gross domestic product.

But his key coalition partner, the Northern League, has indicated its opposition to such a measure and Italy's largest union has also vowed to fight stringent austerity. Indeed, while interest rates on Italian bonds initially dropped to 5.7 percent following the end of the euro-zone summit on Thursday morning, they quickly climbed again. Late on Thursday, the interest rate stood at 5.9 percent, near the level which prompted the European Central Bank to step in and begin buying Italian bonds in August.

German Chancellor Angela Merkel acknowledged on Friday that the euro-zone still hadn't put the debt crisis behind it. In comments to the press in Berlin, she said that further measures will be needed to unify European fiscal policy. "I think that we will have to take several additional steps," she said.

German commentators on Friday focus on the deal reached on Thursday morning in Brussels.

The center-right daily Frankfurter Allgemeine Zeitung writes:

"Whoever believes that the crisis has now passed its zenith is terribly mistaken. ... It is unlikely that the 'firewall' against market volatility that European leaders had hoped for has now been put in place. It is, of course, encouraging that Italian Prime Minister Silvio Berlusconi was forced to present the outlines of a reform plan. But his letter of intent speaks of the distant future. It is unlikely that risk premiums on Italian bonds will begin to sink. Against this background, it could be that portions of the Brussels compromise pushed through by Chancellor Merkel could have a short half-life. Europe is no longer speaking of allowing the European Central Bank to continue with 'unconventional measures' -- meaning the purchase of sovereign bonds. The idea of granting the EFSF a banking license has also been discarded for now. But as soon as the need arises once again, that will change quickly. And nobody will presume to claim that the new agreements will result in a lasting resolution to the crisis. On the contrary. The question is, rather, when the next crisis summit will take place."

The left-leaning daily Die Tageszeitung writes:

"Above all, €1 trillion simply won't cut it, because not even €2 trillion would be enough. The crisis now has a life of its own and has eaten its way into the heart of the euro zone. A real inability of Europe's debt-laden countries to pay back the money they owe would mean mass panic among financial investors. Meanwhile, Italy and even France are seen as potential candidates for insolvency, which is absurd. The countries possess two of the world's strongest economies."

"The euro crisis will only be over when the euro has become a normal currency like the yen, the dollar or the pound. This includes a European Central Bank able to buy up government bonds, much like the Bank of England routinely does."

"Such a solution remains distant, however. Chancellor Merkel continues to rely on state-level solutions like the so-called 'debt brake.' Each country is to tighten its purse strings in order to calm the financial markets. No one even talks about the alternative: that rich people could pay more taxes. The prescribed cuts will deepen the recession, which in turn produces deficits and sends investors into a whole new cycle of panic. The decisions from Brussels weren't harmless -- they will exacerbate the crisis rather than solve it."

The Financial Times Deutschland writes:

"Just weeks and days ago, many thought it was all unattainable. European leaders, meeting late into the night, deserve praise for making it happen."

"But that doesn't mean that there aren't major doubts about the latest summit decisions: Would the markets still be reacting with such euphoria if the technical details of the 'voluntary' debt haircut were understood? How much in risk premiums will investors demand for government bonds that are only partially guaranteed by the EFSF? And then there is still Greece, this country without a business model, which is expected to reduce its debts down to 120 percent of its gross domestic product by 2020. It remains questionable as to whether this still enormous mountain of debt will be more manageable for the country (or more acceptable for the capital markets). But without stronger growth -- probably also fueled by EU aid -- this goal remains fiction."

The conservative daily Die Welt writes:

"The Italian problem did not go away. The country could come under even greater pressure in the coming weeks and the reform paper quickly assembled by the weak head of government Silvio Berlusconi is not likely to convince market participants. As a result, capital market pressure to finally outfit the euro backstop fund with endless guarantees and no ceiling will only continue to intensify. Merkel has to fight against that pressure. But the chancellor is increasingly pinned between her responsibility to the German taxpayer and her historic responsibility for Europe's crisis-ridden countries. It is an incredibly difficult -- and potentially crushing -- position to be in. So far, however, Merkel has managed well."

"But what does the euro crisis now mean for Europe? It will change the union down to its very foundation. Relations among the member states are likely to become more difficult and battles over resources more intense. The history of Europe has thus far been marked by permanent expansion and increased integration. Despite occasional friction, it has been a success story. Now, however, it threatens to drift apart and may even face an internal split. The task of those with political responsibility is to limit these destructive forces.... In a sentence, it is no longer about saving the euro, rather it is also about saving the European community as a whole."

The business daily Handelsblatt writes:

"Winston Churchill uttered the words: 'The Americans will always do the right thing… after they've exhausted all the alternatives.' One can say the same thing about Europeans today. After they have spent more than a year tinkering with all of the problems of the debt crisis, always presenting half-hearted measures to buy more time, now they are finally adjusting the right screws, in order to at least get the acute crisis under control. Better late than never. At least that's how the markets reacted yesterday. The summit fulfilled their narrow expectations, causing enough relief for a rally...."

"The fact that banks absolved Greece of half its debts is without a doubt the most important result of the summit. One could complain that it releases Greece from accountability for its catastrophic financial policies. But without this debt relief, Greece would have had no chance of getting back on its feet."

"Berlin is especially proud of the fact that the European Central Bank (ECB) is to be left out of the rescue of the highly indebted nations. This promise will be difficult to keep, at least in the short-term. As long as the EFSF is not yet fully functioning with sufficient 'firepower' at its command, the ECB will still have to jump in as the 'lender of the last resort.' Designated ECB President Mario Draghi knows that, and therefore deliberately left the door open to further buying up of government bonds."

The center-left Süddeutsche Zeitung writes:

"European leaders were able to restore confidence in the EU. Europe lives, and it is strong enough to handle its problems. Nevertheless, it is a fundamentally changed Europe that the world will now have to deal with. The power structure in the EU has permanently shifted. France, which for a long time dominated European integration, has been pushed back into second position behind Germany. The tempo and methods of the crisis management have been, and will continue to be, determined by Berlin. Because the French have not modernized their economy and their social system, they themselves are under distress. A France, though, that has to fear for its international creditworthiness, is left with no alternative but to follow the course of those with the economic power and financial potential to pull the euro out of the danger zone."

"Germany has, for understandable reasons, always sought to avoid playing a solitary leadership role in the EU. But ... because there is no other country that can take it over, Germany must do so. It would be to the EU's advantage if Berlin cleverly and confidently assumed this role -- but in doing so, the German government must resist the temptation to confuse German and European interests."

"Angela Merkel has proven how that can work by successfully persisting against massive resistance and showing that changing EU treaties should not be taboo, if lessons are to be drawn from the crisis. Because overcoming the current crisis is important, but essential to the [euro's] survival is that it not fall back into old inefficiencies. The best remedy against that is a new reform debate."

Source: Der Spiegel (10/28/2011)