September 12 - judgement day for Europe?
by Francesco Guarascio
The next crucial date in the calendar for the future of Europe is set for the September 12 when the Germans will give their final response on the legality of the eurozone rescue fund, the Dutch people will vote for a new government and the European Commission is expected to unveil plans for a banking union, PublicServiceEurope.com reports
In recent months calendars have been filled with special dates, ultimate deadlines, make or break summits and top-level meetings - each presented as being decisive for the eurozone crisis. Each failed to deliver a lasting solution to the ongoing economic and financial turmoil. Therefore, expectations should not be high for the next special date - which by a pure coincidence of events will be September 12. Yet it would also be unwise to underestimate the importance of the outcomes of this 'Special 12'.
Perhaps, the most important decision will come from Germany. This should not be surprising as Berlin has gradually become the undisputed, yet not always impartial, arbiter of all important European decisions in the last few years. On September 12, the German Constitutional Court will deliver a long-awaited ruling over the legitimacy of the eurozone's permanent rescue fund - known as the European Stability Mechanism. The green light from Germany's top court is crucial to putting the fund in place, since the country will be the main contributor to the common pot. The ESM will replace the existing European Financial Stability Facility, boosting the size of the eurozone's financial firewall to €700 billion.
A possible intervention in the sovereign bond markets to help eurozone countries under attack, such as Spain or Italy, is deemed by experts as not possible without the resources of the ESM. The permanent fund was supposed to come into effect at the beginning of July, but German doubts delayed it – contributing to a temporary upsurge in the crisis. The ruling of the court is widely expected to be positive, although a surprise decision cannot be ruled out. Should the court approve the ESM, it is possible that the German constitutional judges will wish to add new strings to the use of the fund. It is unclear how far they might go. Negative reactions from the financial markets are possible if the conditions for the use of the ESM are set too high. The importance of the court ruling will also have to be weighed against the decisions expected in the crucial meeting of the European Central Bank in Frankfurt, next Thursday, on a possible bond buying programme for stressed countries.
In parallel, the Netherlands will go to the ballot box in an election which could significantly change the country's stance over Europe and affect the balance of power in the continent. To date, the Dutch have been firm allies of the Germans in predicating fiscal discipline as a way out of the crisis. However, a new government could emerge from the polls and may instead oppose austerity and reject the pro-discipline treaty known as the 'fiscal compact,' which is one of the pillars of the draconian policies advocated by Berlin. The leftist Socialist Party stands to obtain its best result ever and is seen by some pollsters as the possible winner of the elections. Its charming leader, Emile Roemer, is staunchly opposed to cutting welfare expenditure at home for the sake of abiding by the tight fiscal discipline imposed by Germany.
Should he win, Roemer will need to form a coalition with parties taking more cautious positions. But he will still be likely to influence decisions in an unprecedented way. Germany will certainly lose an ally in Europe if Roemer's party prevails in the polls on September 12. For Europe as a whole, a Socialist Party victory in the Netherlands would have less clear consequences. The party wants to reverse cuts made by the current caretaker government, which is headed up by the liberal Mark Rutte. For many experts, this also implies denying future financial help to eurozone countries in need. Although this is a widespread view within Dutch society, known for its legendary thriftiness, it is less likely that a socialist-led government would eventually refrain from showing solidarity to partners in trouble. Once in power, the Socialists of François Hollande in France immediately softened the tough narrative of Nicolas Sarkozy on fiscal discipline.
As if the day was not already charged with important events, European Commission President José Manuel Barroso decided to fix the date of September 12 for his traditional statement on the state of the union - a copycat European version of the far more influential annual speech to the nation by the president of the United States. Barroso will use the occasion to unveil details of the proposed banking union - the most likely potential remedy suggested to date by the European Union to address the roots of the crisis and prevent it from recurring. Banks have been among the first actors to exploit the European single market since its introduction. They have relentlessly expanded their businesses across European borders amid a wave of acquisitions and mergers with local partners. Banks did so in a sort of legal vacuum, as their supervisors remained national while their businesses quickly went European or global.
Having been left to self-regulate, or having been overseen by extremely 'light touch' rules, many European banks have overextended themselves - making their businesses vulnerable to any change in conditions. The violent change in conditions brought about by the US sub-prime crisis and credit crunch led to rescues by national authorities in Germany, the United Kingdom, the Netherlands, Belgium and a number of other EU countries. The heavy burden of additional debt piled onto national balance sheets made investors rethink their usual benign approach towards eurozone countries' public debts; forcing yields on sovereign bonds to rise. The lack of confidence has since spread to other - less exposed – banking systems, such as Italy.
Five years into the crisis, the European Commission has finally decided to intervene in one of the most striking examples of unfinished business in the single market. The European Central Bank will be proposed as the common supervisor for all eurozone banks. What remains unclear is how this system would work for European banks outside the eurozone, particularly for the City of London - by far the most important financial hub. The September 12 will, perhaps, see a response to this thorny issue and the other key issues. However, as things stand now, there will need to be many other Special 12-like events before the crisis is permanently solved.
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Who wrote this? Italy's banks are, perhaps, more exposed than any other member state - ever heard of Unicredit? The point about banks operating in a legal vacuum is frankly illiterate. The final paragraph is meaningless. Apart from that, I really enjoyed it.
Jim - Brussels