ANALYSIS:Spain grabs a chance to point finger but, with the horizon still bleak, in-fighting won't help, writes ARTHUR BEESLEY
AS PRESSURE piles on Spain, EU leaders are trying to damp down tension in the financial markets by taking complex steps to reinforce the foundations of the single currency. After months of policymaking on the fly to rescue Greece and prevent contagion, yet more difficult decisions now loom.
Europe’s leaders bought themselves time last month when they agreed with the IMF to create a €750 billion safety net for distressed euro countries. While it remains unclear whether Madrid will have to make use of the facility, a summit in Brussels yesterday was the first for months that did not take place in the throes of heart-stopping panic over the debt crisis.
If the measures EU leaders have taken to date constitute repeated emergency surgery to keep a gravely ill patient alive after many years of self-indulgence, the prime task now is to ensure a smooth convalescence and a return to health and vigour by completely reforming the patient’s lifestyle. Hard liquor out, carrot juice in.
For all 27 EU members – and the 16 euro countries particularly – this means the adoption of far-reaching measures to improve the central co-ordination of Europe’s diverse economies. It may also lead to the creation of sovereign default procedure in the euro, something fraught with risk.
The guiding principles of the refined economic management system are well established at this point: early peer review of draft budgets in Brussels and other capitals; swift sanctions for rule-breakers; and a closer eye on indebtedness.
But Europe’s leaders remain deeply divided on the nitty-gritty. While they approved outline reform plans last evening, detailed technical work will continue throughout the summer to align their sometimes diverse positions. The same goes for manoeuvres to tax banks to insure against future bailouts, and a clutch of other measures with which the European authorities are trying to find a firm footing in the swamp.
Much of the conflict is rooted in deep disharmony between French president Nicolas Sarkozy and German chancellor Angela Merkel.
Sarkozy and Merkel tried project unity in Berlin last Monday when the French leader backed down on his demand for the creation of a euro zone secretariat to take charge of the currency’s “economic government”.
This stemmed from French efforts to impose political will over the ECB and curb German influence over the EU. At another level, however, Sarkozy’s position smacked of an effort to preserve France’s reach in the union.
Dr Merkel has apparently carried the day on 27-country surveillance but her insistence that countries that breach EU budget rules should have their voting rights suspended when finance ministers meet has run into a lot of resistance. This requires treaty change, something opposed by most other countries.
Other countries are at loggerheads on other issues too, for every step to harden the rules and deepen co-ordination has heavy implications for national leaders throughout the union.
For instance, Spanish support for the publication throughout Europe of bank stress-tests looks like an act of self-defence.
Although all countries will now proceed with the publication, Madrid knows well that French and German banks have heavy exposure to Greek sovereign debt. For embattled prime minister José Luís Zapatero, therefore, the call for transparent stress-testing is an indirect means of pointing a finger at other countries.
Also at issue is whether financial sanctions should be automatic or semi-automatic and whether they should involve a withdrawal of EU structural funds. The latter option is resisted by many accession states as they are bigger recipients of such funding.
The Netherlands, Finland, Luxembourg and Sweden want automatic sanctions but other countries do not.
In addition, highly indebted Italy and Belgium want softer language on efforts to give new prominence to debt levels in budgetary surveillance. What is more, Italy wants personal debt levels included when scrutinising debt at a European level. Given sky-high personal indebtedness in Ireland, this proposal is not without potential for controversy.
Despite some concern in Dublin about the potential for bank and transaction taxes to erode bank capital, Taoiseach Brian Cowen came out firmly in support of the notion. It remains unclear, however, whether the proceeds go to national coffers – as the Taoiseach seems to want – or a dedicated European fund.
These are but some of the tensions in play. In normal circumstances, Europe’s leaders would be happy to let them fester for years to avoid tough decisions. That is a luxury they can no longer afford. With debate on debt restructuring still to come, it is an unappealing horizon.
