Don't discount the EU's suicidal tendencies
Fudging, papering over the cracks, the EU seems capable of any kind of cover up to ensure no one has to confront the crisis. But the whole edifice is looking pretty shaky
The goings on in the Eurozone over the past couple of weeks will be seen as one of the lowest points in its short history. The British voter will have been principally concerned at the bill for £1.7 billion which arrived in the final few days of the outgoing Commission.
Michael Gove compared it to the spoiling tactics sometimes seen in America as one presidency hands over to another.
This is possible but it is equally likely to be bureaucrats pursuing their brief with the moral certainty of 12th century crusaders. If you argue, you’re fighting against The Cause, see? The Cause has no problem with penalising success and rewarding failure.
But we should not discount the Eurozone’s tendency to destroy itself either. The last few days have been the time of the budgets and of the banking stress tests. Both have been botched.
To understand Europe, you have to be able to grasp a mindset where a law can be passed to much fanfare, without anyone ever having the slightest intention to enact or obey it. Manuel Valls, the French Prime Minister, when asked what he was going to do about France breaking the Stability Pact, said that he would not even entertain such talk: ‘France is an independent country...’.
It is not, of course. France signed the Stability Pact requiring it to meet budgetary norms it couldn’t meet, and broke it (with Germany) immediately. It agreed to submit its budget to the European Commission before getting it approved by its own parliament: hardly a sign of independence.
Equally, Italy has a law which says the budget must be balanced: a laughable notion. The new budget will be nodded through without anyone demanding the country keep to its promises.
France and Italy, along with a few others, had their budgets disallowed. Now each has been approved, following very modest adjustments. Jyrki Katainen, the normally austere budget commissioner, has said that there is no significant breach of the rules, stretching the meaning of the adjective to breaking point.
The odd thing is that there is a good case for letting these countries have expansionary budgets -- the Eurozone is dipping into a depression from which it may take years to emerge. But that is not the European (German) policy. Europe needs to maintain credibility but finds it easier to permit breaches of the rules, perhaps hoping the markets won’t notice. Everyone is OK; all shall have prizes.
The banking stress tests are another case in point. The papers reported with lip-smacking horror that nine Italian banks had failed the tests. In fact, seven had raised the required money but late; Carige, the Genoa Savings Bank was a little short but not enough to worry about; and the big loser was Monte dei Paschi di Siena (MPS), the world’s oldest bank.
But everyone knew MPS would fail. It had been run by a socialist foundation, which could not afford to inject new capital, but which did not want to let go control. The bank had repaid a chunk of state aid recently and will almost certainly have to be sold.
The scandal of the stress tests is not MPS. The tests do not take into account the risks of deflation or of sovereign default, still a spectre on the horizon. And they are not as strict as the Bank of England’s tests.
More than anything else the tests do not consider the banks’ ability to drag their various countries out of the mire they are in. The leverage of Italian banks is 25:1, meaning they have lent out twenty-five times their capital, and it would only need one twenty-fifth of their loans to go bad to wipe it out. Almost crisis levels.
The fact that they have passed the tests mean that they have made what the rules say are ultra-safe loans, mainly to the Italian government. This means they have no money to lend to businesses, which is what is needed to get the investment and growth to stave off inflation.
But that won’t be mentioned.
Fudging, papering over the cracks, the EU seems capable of any kind of cover up to ensure no one has to confront the crisis. This is filling the cracks with fudge and hoping the wall survives a stress test.
The whole edifice is looking pretty shaky.
Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelance writer, novelist, and farmer. You can read more of his articles about Italy here
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