Bailout for Spain & Italy is a Prelude to ‘German Empire’
The London Telegraph’s Bruno Waterfield breathlessly reported as many other news outlets had that “On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.
How much “disarray” there in fact was is debatable. Whether the “threat” to “block ‘everything’” had any real teeth or motivation is similarly – dubious. The cynicism is due to the fact that in Europe all boats rise and fall together. The German economy relies heavily on exports of which 60% comes from the Eurozone, conversely the Eurozone relies on a growing and healthy consumer base in Germany to buy their exports.
While German Chancellor Angela Merkel and her finance minister Wolfgang Scheauble have balked at mutualization of debt across the eurozone they have signaled it could become more palatable if stricter controls and robust accountability were imposed on individual countries’ spending and borrowing. Who will decide those controls and regulations will undoubtedly be heavily influenced by Europe’s largest and most healthy economy why any centralization of power may lead to a new “German Empire”.
Motivating factors, however, have seemingly come into play and begun to melt German resistance to common borrowing and other similar proposals and may even lead Germany to rethink their own constitution, which precludes them from such activities. Fox News reports many analysts:
“…think a downturn would force more Germans to recognize how much they depend on other European nations to buy their goods and support the German economy. They could become more willing to jointly accept the risks of backing weaker countries’ debts.”
Indeed as German business optimism fell in June due to a slowing in manufacturing, at the heart of their export led growth, look for more capitulation like the agreement reached on Friday to save Italy and Spain.
According to the Telegraph:
Under the deal [reached at the EU summit on Friday], Spanish banks will be recapitalised directly by allowing a €100 billion EU bailout to transferred off Spain’s balance sheet after the European Central Bank takes over as the single currency’s banking supervisor at the end of the year.
The decision detailed in a seven-page document by the “Gang of Four” EU presidents aims at putting the Eurpoean Central Bank (ECB) at the center of a “effective single supervisory mechanism.” The summit rationalized the move: “We affirm that it is imperative to break the vicious circle between banks and sovereigns.” How yielding sweeping controls and expansive powers over to a central bank will address the underlying problem of competition, innovation and growth is not addressed in the document.
Relief for Spain was accompanied by promises to purchase Italian bonds using EU bailout funds in order to reduce Italy’s borrowing costs and to “examine the situation of the Irish financial sector” offering possible relief to Ireland by relieving the government balance sheet debt burden.
Herman Van Rompuy, the president of the European Council of EU leaders and one of the Gang of Four who crafted the European Federation document to be formally presented in December, lauded the agreement as an important step “to reassure markets and to get again some stability around the sovereign bonds of our member states.”
He did, however, warn the new aid measures would be reserved for “countries that behave themselves” by abiding by the EU’s fiscal rules and austerity measures, but without sticks so far and bailout after bailout seemingly without end these milquetoast threats have had all the credibility of a spoiling mother. Considering the clear interdependency in the eurozone and the propensity to kick the can down the road one must wonder what “controls” and “accountability” will be incorporated later this year. But if the economic conditions worsen, especially for Germany look for more bailouts and “draconian” control measures of which all will color the character of this new economic empire.