Thanks to the statements of two of the most senior officials in charge of the fate of the single currency, sovereign debt markets stayed calm during August.
First it was European Central Bank (ECB) President Mario Draghi, who late in July declared that the ECB was ready to “do whatever it takes“ to ensure the survival of the euro, opening up the prospect of a massive intervention in the markets by the ECB to keep interest rates for Italy and Spain at tolerable levels.
Then, last Thursday, the German Chancellor dispelled all doubts of her support for the guarantees made by the ECB president, which she considers “fully in line” with her own conception of affairs.
So why forecast a “Black September” for the euro crisis? Because Europe, two years on, is hopping from “victory” to “victory” right up until it reaches its next defeat? Because behind this summer calm, the markets continue to harbour profound doubts about the viability of the single currency?
To these two reasons, which reality will confirm or prove wrong, we can add signals of mounting concern that Europe is on the verge of losing the political battle that will truly decide its future. And August was particularly rich in signals of this kind.
Earlier this month, in a now famous interview given to Der Spiegel, Mario Monti summed up the issues. “Tensions in the euro area these last years have exposed signs of the psychological dissolution of the European Union (...). If the euro becomes a factor in the disintegration of the European Union, the foundations of the European project will be demolished.”
Events were to prove Monti right, showing almost irrefutably that the markets are not the only ones to doubt the euro will survive.
In the latest episode to date, the Finnish Minister of Foreign Affairs has admitted publicly that his government had made contingency plans to deal with a possible implosion of the monetary union. The quick denials from the government in Helsinki and their assurances that the minister's statement was not official policy went unheeded: the debate in Finland now is whether it should leave the euro.
Unlike in Germany, in Finland matters can be stated much more clearly in the debate, because the consequences would be much less severe for the country. In Germany, all the same, we have heard the Minister of Economy declare that a Greek exit from the euro was no longer inconceivable.
We have seen several prominent personalities of the CDU-CSU express their outrage at the “insolence” of the President of the Eurogroup, Jean-Claude Juncker, who had the audacity to declare that Germany had its share of responsibility in the worsening euro crisis by asking a simple question: “Is the eurozone any more than a branch of the Federal Republic?”
A quick glance at the headlines of German papers is enough to leave no doubt about the seriousness of the “prejudices“ that Mario Monti speaks of in Der Spiegel and the dangers of this “psychological dissolution” of Europe that he warned against. All of the papers seem to be expecting a return of the “Iron Chancellor”, to stand up against Greece, which is demanding more time.
Against the ECB, which has arranged to pump money into the “defaulter” countries. And against France, which intends to ensure the welfare of its retirees on the backs of the German taxpayer.
In the other countries of northern Europe, the political climate is not very different. In the South, the question is about how far austerity can be pushed without killing the very idea of the European Union – or how far the policy of “humiliation”, brought on by a bail-out that voters are willing to tolerate, can go.
There are two hopes facing this accelerated risk of the political dissolution of Europe, and the highest officials in Brussels are clinging to them.
The first hope is Angela Merkel herself. Most are convinced that the Chancellor is fully committed to saving the euro, because saving the euro is in Germany's interest. Some doubts, however, linger.
Just how far can the Chancellor go to reconcile the two objectives that seem to motivate her – to save the euro and to prevent a right-wing nationalist party from emerging in Germany, as has happened in Finland and the Netherlands? Some observers believe her a master in the art of navigating this ever narrowing path.
Others believe that the climate of German public opinion has shrunken her room for manoeuvre and that they will have to wait for the September elections and a “grand coalition” with the SPD to give her the capability at home in Germany to do what needs to be done.
The second hope, the most obvious one, boils down to the key political issue that all the governments of the eurozone have to confront: if not the euro, what is the alternative?
The thing that makes September so dramatic in terms of tacking the European problem, is that it is practically impossible to know at which moment Europe will have committed itself too deeply to the dissolution path, to reverse direction.
Or, in other words, to know what the event will be the one to mark a turning point in the European crisis. A verdict in the German Constitutional Court on September 12 which rules against the European Stability Mechanism? The outcome of elections in the Netherlands on the same day? Something else? No one knows. That is the great risk facing Europe today. Just replace the word “prejudice” with “nationalism."
Close-run autumn for the euro
“September will be the most dangerous month”, warns Público: “in the wake of the summer break, the autumn is coming, and with it, a ‘make-or-break moment’ for the eurozone”. In the run-up to all of that, next week will be fraught with diplomatic manoeuvres —
… Greek Prime Minister Antonis Samaras is to fly to Berlin and Paris to meet with Angela Merkel [on August 24] and François Hollande [on August 25], in the wake of his meeting with Eurogroup President Jean-Claude Juncker [on August 22 in Athens]. His goal will be to convince the European leaders to allow Greece two extra years to complete its cost-cutting programme. Merkel and Hollande are also planning to come together [in Berlin on August 23]. Before the end of the month, it will be Italian Prime Minister Mario Monti’s turn to travel to Germany to sit down with the Chancellor, before he flies to Madrid [on September 6] to meet with Spanish government leader Mariano Rajoy.
In any case, “the month of September will be decisive”, explains Público —
… that is when [on September 12] Germany’s constitutional court will decide on the viability of the euro’s permanent bailout mechanism, the ESM. It could also be the month when Greece runs out of money. If that happens the country will be obliged to request more time and more funds from northern European countries that are increasingly sceptical — a case in point is the Netherlands where the extent of this scepticism will shortly be measured [in general elections to be held on September 12]. Finally, eurozone leaders will also have to be careful to prevent the fall of the two crucial dominos of Spain and Italy, which would take down the rest of the eurozone with them.
Last but not least, on September 6 President of the European Central Bank Mario Draghi —
is to provide ‘details on how he will intervene in bond markets’ with the aim of reducing the yield spread between the most indebted countries and other eurozone states.