Remember July, when leaders were congratulating themselves for solving the eurozone crisis? The summit, on 21 July, with agreements to bail out Greece again, the private sector involvement, the bond buy-backs, the bond-purchasing on the secondary market, a plan for strengthened economic governance? “Talks pull eurozone back from the brink” was the headline in European Voice. “But only for a few days”, we could have added.
Much of the optimism has evaporated over the past six weeks – six weeks in which stock markets crashed, leaders were forced to cut holidays short and member states argued with each other, without quite getting round to ratifying any of the agreements made at the summit. The eurozone has slid back to square one.
Alarm bells started ringing almost immediately in the days following the summit. EU officials struggled to explain the finer details of the deal and national governments seemed to be offering contradictory accounts. Olli Rehn, the European commissioner for economic and monetary affairs, admitted as much a week later when he called for “rigour in our communication and verbal discipline”.
It transpired that the private sector involvement was not as significant as leaders had made out. Then George Papandreou, Greece’s embattled prime minister, put the cat among the pigeons by describing the loans granted to his country as tantamount to ‘Eurobonds’ – exactly the sort of debt-pooling that German Chancellor Angela Merkel and her northern eurozone allies had been so keen to reject.
It was not looking promising. Even before the end of July, the finance ministers of France and Germany released a statement defending the summit agreement, saying that the “comprehensive set of measures” had “prevented Greece’s sovereign-debt crisis from becoming a crisis that could damage the eurozone as a whole, and the euro as a consequence”. They were protesting a little too much.
Then, as everyone except the markets went on holiday, the serious trouble started. Yields on Spanish and Italian debt reached record levels, and rumblings that the 21 July agreement was already unravelling got louder.
Cue José Manuel Barroso, the European Commission president, who in attempting to draw a line under the deteriorating situation somehow managed to make it a whole lot worse (See ‘A flawed attempt to take control’).
If the reaction from national governments to Barroso’s exhortation was swift and harsh (officials in Germany were particularly scathing), it was nothing compared to the response that the markets had in store. Major shares in the UK, Germany and France fell by between 2% and 3% in 24 hours. In the days that followed they fell even further, experiencing their worst performances since the darkest moments of 2008.
Jean-Claude Trichet, the president of the European Central Bank (ECB), did not help matters when, just after the monthly meeting of the bank’s governing council, he announced that the ECB would be restarting its controversial bond-buying programme in an attempt to lower countries’ borrowing costs.
The markets should have welcomed the decision but, instead, they were riled. The bond-purchasing was limited to Portugal and Ireland rather than being expanded to Italy and Spain. This was seen as Trichet’s way of exerting pressure on the governments of the two Mediterranean countries to get their acts together on austerity.
If that was Trichet’s intention, the plan fell apart just three days later when, after an emergency governing council conference call, bond purchases were indeed extended.
The feeling was that no one was in control of the crisis. Trichet admitted that the ECB’s initial decision had not been unanimous. Pressure was mounting on Italy and Spain, where bond yields were now approaching levels experienced by Ireland and Portugal when they were forced to call for bail-outs. Silvio Berlusconi, the Italian prime minister, announced a new wave of austerity measures, while José Luis Rodríguez Zapatero, his counterpart in Spain, had a crisis telephone conversation with the leaders of France and Germany.
Barack Obama, the president of the United States, whose own country’s debt problems were doing nothing to ease tensions this side of the Atlantic, held telephone discussions with Berlusconi and Zapatero.
Back in Brussels, Rehn was blaming the “unrealistic expectations” of what the 21 July summit had achieved. It was a bit late for that.
Emergency discussions the following weekend between G7 leaders did nothing to calm the tension, but glimmers of hope did emerge. Stock markets rallied during the following week and, in its first review of Portugal’s post-bail-out austerity programme, a team from the European Union and the International Monetary Fund on 12 August delivered a positive assessment.
In addition, Belgium, France, Italy and Spain took decisive action temporarily to ban short-selling – a practice that some blame for exacerbating market turmoil.
The confidence did not last long. Eurozone growth figures announced on 16 August were worse than feared. Germany’s economy, the supposed powerhouse of the eurozone, was virtually at a standstill in the three months to June.
The announcement was a terrible hors d’oeuvre to an emergency summit between Merkel and Nicolas Sarkozy, France’s president, in Paris that evening (See ‘Merkel and Sarkozy fail to calm markets’).
There was more to come. As the end of August approached, just as the markets were beginning to calm down, another problem emerged. This time it was back to the politics of the 21 July agreement.
A bilateral deal was struck that would see Finland receive collateral from Greece in return for its participation in the bail-out. Despite this being expressly permitted in the conclusions of the summit (and indeed it was a deal-breaker for the Finns), it did not go down well with other governments, some of whom said that if Finland could get such an arrangement then so should they.
Moody’s, a credit-rating agency, wearily warned that “if more and more of the rescuing countries end up making collateral demands, Greece will not be able to fully meet them, thus jeopardising the rescue plan”. Now it looks as if other member states will block the move anyway.
The summit on 21 July was supposed to be the beginning of the end of the crisis. Measures hitherto considered taboo because of political sensitivities were finally agreed upon and the mood was positive. But the events of the past six weeks have demonstrated that politicians have still not got a grip on this crisis. Analysts are still talking about the need to double or treble the size of the European Financial Stability Facility and urging the introduction of eurobonds just as they were before.
A lack of decisiveness, plain-speaking, courage and co-ordination immediately before and during the summer break has left the eurozone looking as vulnerable as ever.