Re: Behind the scenes -- the euro was close to collapse in May
- From: ADR <aretzios@xxxxxxxxx>
- Date: Sun, 26 Sep 2010 22:30:09 -0700 (PDT)
On Sep 25, 8:00 pm, Alexander Arnakis <inva...@xxxxxxxxxxxxxxx> wrote:
http://online.wsj.com/article/SB1000142405274870346700457546411360573...
On the Secret Committee to Save the Euro, a Dangerous Divide
By MARCUS WALKER, CHARLES FORELLE and BRIAN BLACKSTONE
BRUSSELS -- Two months after Lehman Brothers collapsed in the fall of
2008, a small group of European leaders set up a secret task force—one
so secret that they dubbed it "the group that doesn't exist."
Its mission: Devise a plan to head off a default by a country in the
16-nation euro zone.
When Greece ran into trouble a year later, the conclave, whose
existence has never before been reported, had yet to agree on a
strategy. In a prelude to a cantankerous public debate that would
later delay Europe's response to the euro-zone debt crisis until the
eleventh hour, the task force struggled to surmount broad disagreement
over whether and how the euro zone should rescue one of its own. It
never found the answer.
A Wall Street Journal investigation, based on dozens of interviews
with officials from around the EU, reveals that the divisions that
bedeviled the task force pushed the currency union perilously close to
collapse. In early May, just hours before Germany and France broke
their stalemate and agreed to endorse a trillion-dollar fund to rescue
troubled euro-zone members, French Finance Minister Christine Lagarde
told her delegation the euro zone was on the verge of breaking apart,
according to people familiar with the matter.
.The euro zone's near death had stakes for people around the world. A
wave of government defaults on Europe's periphery could have triggered
a new crisis in the international banking system, with even worse
consequences for the global economy than the failure of Lehman.
The dangerous dithering was driven by ideological divisions that
continue to paralyze the currency union's search for solutions to its
structural flaws. Deep differences on economic policy between Europe's
frugal north and laxer south, between Germany and France, and between
national governments and central EU institutions hindered an effective
early response to the crisis. Only when faced with calamity—the
collapse of the euro zone—did leaders put aside their differences and
reach a compromise.
Complicating matters: The two most important politicians deciding the
fate of the euro often had conflicting agendas—and much at stake
personally.
French President Nicolas Sarkozy, known in France as the
"hyper-president" for his relentless flurry of new initiatives, faced
declining approval ratings as his domestic economic overhaul stalled.
The excitable 55-year-old leader saw that Greece's woes could rock the
euro zone. Mr. Sarkozy seized on the issue as an opportunity to prove
his leadership chops and thus shore up his popularity.
For German Chancellor Angela Merkel, 56, the crisis was the biggest
test of her career. A trained physicist known for her cautious,
deliberative style, she feared a backlash from German voters and
lawmakers, and defeat in Germany's supreme court, if she risked
taxpayer money on serial deficit-sinner Greece. Despite pressure from
Mr. Sarkozy, she fiercely resisted a quick fix.
When Mr. Sarkozy barreled into one meeting with camera crews and
photographers in tow, Ms. Merkel icily ordered the cameras out: "I
won't let you do this to me," she said, warning she wouldn't play the
part of "the stubborn old bag."
Europe eventually did establish a rescue fund in May. By then the
price of calm had soared, requiring a pledge of €750 billion. It
defused the panic but hasn't snuffed out the crisis: Unsustainable
borrowing still poses huge challenges, especially in Greece and
Ireland.
The danger of a government-debt crisis in the euro zone began to
preoccupy top European policy makers in October 2008. Hungary, an EU
member which doesn't use the euro, found itself unable to sell bonds
to jittery investors. The EU, using an existing but little-used
program, and the International Monetary Fund and World Bank swiftly
propped up Hungary by pledging about €20 billion in loans.
But it soon became apparent that the euro zone had no tools to save
one of its own. EU treaties made clear the facility used for Hungary
was off limits to euro members. For most EU officials, the IMF was
taboo, too: Its loans were fine for poor ex-Communist nations, they
felt, but not for developed euro members.
In March 2009, French Treasury official Xavier Musca was preparing to
step down as chairman of the Economic and Financial Committee, an
influential body of technocrats who manage EU economic policy. He
briefed his successor, Thomas Wieser of Austria, on the duties. At the
end of a long list, he added one more. "Incidentally," Mr. Musca said,
"there's a group that doesn't exist."
The secret task force, coordinated by the committee chairman, had been
meeting surreptitiously since November 2008 to craft a plan should a
Hungary-style crisis strike a euro nation. Membership was limited to
senior policy makers—usually just below ministerial level—from France,
Germany, the European Commission, Europe's central bank and the office
of Jean-Claude Juncker, the Luxembourg premier who heads an assembly
of euro finance ministers.
The task force met in the shadows of the EU's many councils and
summits in Brussels, Luxembourg and other capitals, often gathering at
6 a.m. or huddling over sandwiches late at night. Participants kept
colleagues in their own governments in the dark, for fear leaks would
trigger rampant speculation in financial markets.
Potential crisis candidates were obvious: Portugal, Ireland, Greece
and Spain, a group of deeply indebted states derisively tagged with
the acronym "PIGS" by bond traders.
A gap quickly opened up between Germany, attached to euro-zone rules
it viewed as banning bailouts for profligate countries, and France,
which wanted greater freedom for national governments to support each
other as they saw fit.
A fault line also developed over whether EU institutions should run
any bailout operation. The European Commission, the union's executive
branch, pushed for a central role in raising and lending funds—and
found an ally in France. Germany, wary of a power grab, was deeply
reluctant to put its cash in Brussels' hands.
The German finance ministry feared the commission was trying to
establish a precedent for centralized European public borrowing,
through EU bonds. That would imply Germany, Europe's strongest
creditor, subsidizing other nations. Instead, Germany insisted any aid
must come via loans by the individual euro-zone members to a stricken
country. That way Berlin, writer of the biggest check, could control
the process and force a wayward recipient to reform itself.
The philosophical divide among task-force members persisted for nearly
a year. Last October, it ceased to be academic.
That month, Greece's newly elected Socialist government declared the
country's 2009 budget deficit was heading for 12.5% of gross domestic
product -- more than three times the previous government's official
forecast.
Stunned investors began to dump Greek bonds. Greece faced daunting
debt repayments in spring 2010, and it wasn't at all clear if it would
have the money to make them.
By February, it became obvious that the 16-nation euro zone would have
to do something to address the Greek bond meltdown. The secret task
force of France, Germany and EU bureaucrats opened its doors to the
rest of the member countries -- except Greece.
A summit of EU leaders had been planned for Feb. 11 to mull Europe's
long-term economic goals. Governments insisted publicly that Greece
was "not on the agenda." The hope, say aides to several European
leaders, was that if Europe didn't upset the markets by talking about
the matter, Greece might be able to sell enough bonds to escape
trouble.
But Greek bond prices -- a key measure of investor confidence -- began
plunging in the days before the meeting. Luxembourg's Mr. Juncker
convened an emergency teleconference of euro-zone finance ministers on
the eve of the summit. They agreed on a statement to be read at the
summit's conclusion pledging "support" for Greece.
In Berlin's austere chancellery building, Ms. Merkel wasn't happy. Her
advisers were telling her that Greece's problems ran deeper than a
short-term cash shortage: The country was economically uncompetitive
and living beyond its means. Without a deep overhaul, a quick-fix
bailout would keep Greece afloat for only a few months, they warned.
In addition, Germany's supreme court would strike down a bailout, the
advisers warned, unless it was absolutely unavoidable.
Deep in the night, Ms. Merkel called other leaders, including
President Sarkozy, and made it clear she would veto any promise of aid
for Greece unless Athens took much tougher action to cut its public
spending and overhaul its economy.
Mr. Sarkozy replied that Greek Prime Minister George Papandreou was
already taking brave action.
"Now it is time for Europe to help," he said.
"The financial markets will say this is not a solution," Ms. Merkel
told the French leader.
The next day's summit, on a Thursday, was scheduled for 10:15 a.m. at
the Bibliotheque Solvay, a historic library on a Brussels hilltop.
Late Wednesday, EU President Herman Van Rompuy of Belgium postponed it
by more than two hours. Snowy weather was the official explanation
given for the delay.
In reality, Mr. Van Rompuy huddled that morning in his office on the
fifth floor of the EU's summit building with a few key
leaders—including Ms. Merkel, Mr. Sarkozy and the head of the European
Central Bank, Jean-Claude Trichet. Other European leaders were cooling
their heels at the library. On currency markets, the euro was gyrating
in anticipation of a bold rescue -- or a bust.
Mr. Sarkozy pushed the chancellor for a clear public declaration that
Europe stood behind Greece. "I cannot buy that," Ms. Merkel responded.
Eventually, Mr. Van Rompuy brokered a compromise, in the form of a
nine-word sentence tacked on to a statement aides were scribbling out
on a conference table: "The Greek government has not requested any
financial support." The language sneaked in a back-door mention of
Greece, but it conformed to Ms. Merkel's insistence that the country
not be offered any help.
She had won the round.
Other European leaders believed Ms. Merkel was playing for time
because of domestic politics. Her center-right coalition faced a
crucial regional election on May 9 in North Rhine-Westphalia,
Germany's most populous state. Opinion polls showed voters were
furious about the prospect of bailing out the profligate Greeks.
"It was clear that the election was playing a big role," says the
finance minister of another euro-zone country. Spokesmen for Ms.
Merkel strenuously deny that North Rhine-Westphalia influenced her
tactics on Greece.
The chancellor struggled to rein in speculation about an imminent
bailout one Friday in late February, when the head of Germany's
biggest bank, Deutsche Bank Chief Executive Josef Ackermann,
mysteriously appeared in Athens for consultations with Greek leaders.
Mr. Ackermann had an idea for supplying Greece with up to €30 billion
of credit -- half from Germany and France, half from major European
banks.
In a phone call from Athens that day, Mr. Ackermann pitched the
proposal to Ms. Merkel's chief economic adviser, Jens Weidmann. The
reply: unacceptable. "You cannot tell the Greeks that this is a German
government offer," Mr. Weidmann said, fearing the already-widespread
impression that Mr. Ackermann was acting as a go-between.
A posse of cameras met Mr. Ackermann when he emerged from the Greek
parliament building. "I'm regularly in Greece because I love Greece
and the beautiful weather," a grinning Mr. Ackermann said, before
disappearing into his armored Mercedes-Benz.
By mid-March, Greek Premier Papandreou was clamoring openly for Europe
to reassure markets by putting money on the table. Ms. Merkel went on
German public radio that month and said Greece didn't need aid. An
upcoming EU summit should focus on other issues -- and other European
leaders shouldn't stir up "false expectations," she said.
But behind the scenes, Ms. Merkel was starting to take over the
contingency planning.
There was one thing the secret task force had agreed on: Europe, not
the IMF, would handle any bailout. The German finance ministry felt
the same. Involving the Washington-based fund in a bailout of Greece
would be an admission of European weakness, Finance Minister Wolfgang
Schauble said publicly. Mr. Sarkozy, Mr. Juncker and ECB chief Trichet
all shared that view strongly.
Ms. Merkel, however, overruled them all. Her advisers were telling her
that aid to Greece could be sold to her skeptical countrymen only as
part of a wrenching IMF program of economic adjustment for Greece.
IMF-inflicted pain would also deter other indebted euro-zone countries
from seeking aid.
The disagreement came to a head before the broader EU's regular spring
summit in Brussels on March 25.
That afternoon, before all 27 leaders gathered, Ms. Merkel met Mr.
Sarkozy in one of the many spartan meeting rooms in the EU's
warren-like headquarters. The chancellor agreed to announce that the
euro zone would rescue Greece if it faced default—but only as a last
resort, once Greece had exhausted its access to capital markets. Also,
the IMF must be part of any loan package, and the IMF -- not the
European Commission -- should draw up Greece's program of overhauls,
she said.
Mr. Sarkozy protested against involving the IMF, whose biggest
shareholder is the U.S. government. Europe cannot let "the Americans"
decide who gets credit in Europe, he said.
Ms. Merkel put her foot down, insisting that only the IMF had the
necessary experience. Mr. Sarkozy, recognizing that Germany's
financial muscle was essential for any bailout, reluctantly gave way.
On April 11, with the crisis of investor confidence spreading from
Greek government bonds to the country's banking system, the EU finally
put money on the table. As Germany wanted, the €30 billion for the
first year would come in the form of 15 separate
government-to-government loans, while the IMF would lend another €15
billion. Officials hoped the sum, enough to cover Greece's borrowing
needs for less than a year, would be enough to calm markets.
It wasn't.
Alexander, thanks for posting this. Although it has been well
reported that the IMF was brought in by the insistence of Germany and
that the terms of the "rescue" became exceedingly harsh again because
of German insistence, this detailed background adds a lot of
information. Again, it was a great mistake by the Greek government
not to read carefully the tea leaves and request IMF assistance
outside the EU. Had it done so, it would have gotten cheaper loans
and much better conditions although it would have enraged the French.
As usual, the Lesser Papandreou put a lot of stock on French promises
and the French had neither the money nor the political heft to
deliver. Now, at least he knows who the real masters are.
.
- References:
- Behind the scenes -- the euro was close to collapse in May
- From: Alexander Arnakis
- Behind the scenes -- the euro was close to collapse in May
- Prev by Date: Re: Vaccine Nation
- Next by Date: Eat your heart ADR/Roubini and...cry;-) Another slap in the face of ADR/Roubini and a proof that things are not as bad as he wants to be;-)
- Previous by thread: Behind the scenes -- the euro was close to collapse in May
- Next by thread: Re: Behind the scenes -- the euro was close to collapse in May
- Index(es):
Relevant Pages
|
