Media attention has concentrated recently on the MIddle East "democracy" protests and what appears to be degenerating into a civil war in Libya. This focus tended to shift attention from crises that were raging prior to the Middle East turmoil. One such example is European debt crisis. As we approach the European Council Summit towards the end of March, whose goal is to resolve the crisis definitively, the problem facing the negotiators has, if anything, become more intractable.
Last weekend's Irish elections brought into power a Fine Gael-Labour coalition that campaigned on the issue of revising what Ireland views to be a punitive bailout arrangement, particularly in terms of interest repayments.
German Chancellor Angela Merkel adamantly opposes renegotiation, saying “we can’t artificially lower them. One benchmark is that interest rates have to reflect refinancing costs. We cant get to a point where Ireland pays lower interest rates than Portugal”. She added . “If the Irish government now has a problem with interest rates, our job is to figure out what we can do –or whether we can do anything,”
Merkel faces political constraints at home from a German electorate, irate over what it considers the financing of the euro zone's profligate children. Merkel has been portrayed as the iron Chancellor on this issue but she is not alone.
The mirror image of Ireland in the euro zone is Finland that posts a AAA financial health rating. Finland is going to the polls the April 17, and according to the surveys, the stars of this year's election will be the True Finns party. It shares the anti-immigration thrust of other European parties that have achieved recent success, such as the Swedish Democrats and the Dutch Freedom party. If the current polls are born out and the True Finns surge continues, it will be hard to keep them out of the coalition.
A prominent plank of the party's platform is opposition to European bailouts. Instead the party favors expelling the problematic members from the currency bloc:: ‘How come they can’t see the euro doesn’t work?’ Timo Soini, leader of the True Finns,opined. ‘If a melon and an apple each wear the same size baseball cap, everyone can see that it just doesn’t work.’ Either the rotten apples or the bruised melons will have to go, depending on one's perspective.
The True Finns are also illustrative of the problem with the "Competitiveness Pact" solution under which European governments would have to adhere to strict criteria of frugality or risk sanctions, giving nations like Germany an incentive to contribute to the Euro's salvation. The True Finns are opposed to any increase in European powers.
Opposition to the competitveness pact is also growing amongst European trade unions, who believe that the centralized control over national budgets will spell the end of collective bargaining. Finally, nobody has come up with a suggestion on how such a pact can be approved without a ratification process in which it is all but certain that ratification will be opposed by some European Union members.
We are therefore left with a situation where the Greek and Irish bailouts, perhaps soon to be followed by a Portuguese bailout, will be difficult to sustain. The credit market vultures are circling. Under such circumstances we are now hearing the unspeakable words "debt restructuring" under which bondholders stand to face a 40% loss on their investment. This prediction was voiced by Professor Kenneth Rogoff of Harvard University, a former chief economist of the International Monetary Fund. “It’s inescapable to have public and/or private debt restructured in all four countries of Greece, Ireland, Portugal and Spain," he said. “The risk of waiting too long is that it gets bigger and it costs you more.”
The words 'debt restructuring' have been avoided up to now for one because this would put European Union members on a par with developing countries who have experienced this solution. It would also engender a guilt by association impacting on the credit worthiness of the solvent EU members.