Euro saga will drag on and on

Greece is heading for its third bail-out, but nobody in Germany wants to talk about it.

It has been an unusually quiet summer in Europe. The economic data have improved of late, and investors have been waiting for the results of federal elections in Germany on 22 September. But neither of these factors will solve the crisis. As Jeremy Warner notes in The Sunday Telegraph, "new fault lines keep appearing".

One is Slovenia, where, as in Spain and Cyprus, bankrupt banks threaten to bankrupt the government. Slovenia can't grow its way out of the problem as GDP is falling rapidly, says Capital Economics. Recapitalising the banks will cost several times the planned 2.5% of GDP. So it now looks as though Europe will lend Slovenia the money to bail out the banks.

That wouldn't do much for confidence in the eurozone, but "a potentially far more serious problem" is waiting in the wings, adds Warner: "the need for a third Greek bail-out". Greece's debt load has shot up to 160% of GDP as the economy has plunged into depression. To ensure Greece's debt load is returned to sustainable levels, creditors will have to take a haircut.

The last Greek debt restructuring' was confined to private creditors. This one will hit the pockets of European institutions, who now own most of the outstanding debt. This is where politics complicates matters. A debt restructuring would mean that taxpayers' money had been written off; at present, governments can say they are only providing temporary loans with conditions attached.

In Germany, an effective permanent transfer of money to Greece implied by debt restructuring would be very unpopular. Indeed, a Greek debt restructuring has not been discussed in the election campaign.

With the opposition Social Democrats also opposed to permanent transfers of money to the periphery, neither a continuation of the current German coalition, nor a grand coalition' of Chancellor Angela Merkel's conservatives with the Social Democrats, would imply much change in Berlin's basic stance.

So, while Germany may agree to some fudge such as extending the maturity on loans to peripheral states, we are highly unlikely to see the debt relief needed to fix the crisis, reckons the Financial Times's Wolfgang Munchau. All this implies more rancour between north and south, ongoing stagnation in the periphery, and hence further market turbulence. The euro saga will drag on and on.

Recommended

How the Covid-19 vaccine crisis is putting the EU in danger
EU Economy

How the Covid-19 vaccine crisis is putting the EU in danger

The botched coronavirus vaccine campaign will cause long-term harm to the EU's economy, says Matthew Lynn.
4 Apr 2021
How the vaccine wars will harm us all
Global Economy

How the vaccine wars will harm us all

Grabbing and hoarding vaccine supplies, or even manufacturing one’s own, might seem to make sense for a state in an emergency. But the damage done to …
27 Mar 2021
The European Central Bank fumbles its way towards yield curve control
EU Economy

The European Central Bank fumbles its way towards yield curve control

The EU’s economic recovery is faltering, but its bond yields keep rising. That makes things tricky for the European Central Bank, says John Stepek. He…
12 Mar 2021
Vexing vaccine delays hit drug firms
Biotech stocks

Vexing vaccine delays hit drug firms

AstraZeneca and Pfizer are being attacked by the EU over what it claims are delays in delivering the Covid vaccine.
28 Jan 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Properties for sale for around £400,000
Houses for sale

Properties for sale for around £400,000

From a converted church in Banffshire with views towards the Cairngorms National Park, to a period property in the Georgian market town of Beverley, e…
2 Apr 2021