By Neil Irwin
Just a few days ago, Europe’s long-simmering financial crisis seemed to have reached a resolution, following demonstrations of resolve by all players involved to deploy whatever means necessary to heal the deep fissures among the 17 nations using the euro. Never mind. European stock markets tumbled Wednesday amid unrest on the streets of Madrid and Athens and new doubts about the path forward for the continent. The German stock market was down 2 percent, the French market was down 2.8 percent and the Spanish market fell a whopping 3.9 percent.
Thousands of protesters swarmed Spain’s parliament, angry at the budget-cutting by Prime Minister Mariano Rajoy’s government. The leader of the economically powerful Catalonia region called for a referendum to consider leaving the country, showing that austerity threatened the very threads of the nation’s unity. Spain’s borrowing costs for 10-year bonds rose over 6 percent for the first time since early in the month.
Greece was shut down Wednesday by a general strike, with 50,000 people marching on the Greek Parliament as Prime Minister Antonis Samaras attempted to navigate the demands of international lenders for more forceful austerity measures and the pleas of a populace suffering under 24 percent unemployment.
And less dramatically but perhaps more significantly, officials from the financially stronger European countries met late Tuesday in Helsinki and bogged down over how and when a new Europe-wide fund could begin injecting money into the continent’s troubled banks, particularly in Spain and Ireland.
What’s happening is as frustrating for Europe watchers as it was inevitable. For the nearly three years that the euro-zone crisis has been underway, a startlingly reliable pattern has set in. Whenever the European Central Bank steps up and deploys its bottomless ability to print euros to ease the panic on financial markets, everyone else steps down. The political leaders in financially troubled southern European nations see less urgency to the budget-cutting demanded of them by the ECB, the International Monetary Fund and other international creditors. Germany, Finland and other strong Northern European countries dig in their heels on what concessions they demand for aid.
Then the ECB steps back, lets market forces threaten to get out of control again (specifically, by letting bond yields rise) and forces the politicians to act in their common interest. Rinse and repeat.
Earlier this month, it seemed that the ECB had finally broken this routine. With tacit approval from powerful German political leaders (though not Germany’s central bank), ECB President Mario Draghi introduced a program to buy European nations’ debt on a potentially unlimited scale, but with major conditions. The most important at the moment is that a country must formally request the assistance and, in the process, agree to financial conditions from the international lenders.
As Samaras and Greece can attest, it is no fun for a democratically elected government to be forced into deep structural changes in its government and economy on orders from unelected bureaucrats from Washington, Brussels and Frankfurt, Germany. That is why Spain’s Rajoy is resisting the prospect. But as Spanish borrowing costs rise, he may have no choice.
The Spanish prime minister seems to be coming to that conclusion. Asked by the Wall Street Journal whether Spain would seek international assistance, Rajoy said, “At the moment, I cannot tell you.” His government would need to determine whether the conditions attached were “reasonable,” he said, adding that if interest rates were “too high for too long . . . I can assure you 100 percent that I would ask for this bailout.”
Although, superficially, the standoffs in Madrid, Athens and Helsinki this week create new dangers for the euro zone, there is an important difference from the brinkmanship of 2010. All three situations reflect a game of poker, with each side bluffing at least a little to try to ensure that others bear the cost of fixing Europe. But with the ECB’s action this month, at least everyone at the table understands the rules — exactly what will bring to bear the bottomless resources of the ECB, for example.
That leaves the crisis in Europe as a more basic problem: How much will the populations of Spain and Greece take? With a quarter of the workforce unemployed and demonstrators already taking to the streets on mass scale, will the protesters turn more violent or will they vote in ways that rip at the very idea of Europe?
In that sense, the biggest threat to Europe comes not from the outcome of negotiations between the governments, ECB and IMF; it comes from the likes of Catalan separatists in Spain or the radical-left Syriza party that nearly won office in Greece this year. What those countries’ citizens are willing to bear while remaining committed to national unity is an open question.
WP-BLOOMBERG
