11/04/2011 03:01 PM

The World from Berlin

'The Common Currency Endgame Has Begun'

Greece has backed away from holding a referendum on the euro bailout package. This week's tumult, however, shows that Europe is still far away from solving the euro crisis. German editorialists on Friday warn that the worst-case scenario may arrive sooner rather than later.

It took less than a week for confidence in the euro zone to evaporate. Again. Last Wednesday, European Union leaders agreed to sweeping measures aimed at saving the common currency. But the shocking announcement on Monday by Greek Prime Minister Georgios Papandreou that his country intended to hold a referendum on the conditions of the bailout measures, with its rigid and unpopular austerity measures, was all it took to shake markets again and raise doubts about the strength of the bailout.

As if that weren't bad enough, interest rates are rising on Italian government bonds again -- this week increasing to 6.4 percent and ever closer to the psychologically important 7 percent figure at which analysts believe the country will begin to have significant difficulties refinancing its debt.

On Thursday, even as Papandreou abandoned his referendum plans, he reinforced the image of a bumbling euro zone unable to get a grip on its currency crisis. His about face came within 24 hours of an emergency meeting with euro-zone leaders in Cannes -- and under tremendous pressure from German Chancellor Angela Merkel and French President Nicolas Sarkozy.

For the first time, the pair broke a longstanding taboo by raising the prospect that Greece might be forced to exit the euro. "We are prepared," Merkel said. And high-ranking representatives of the euro states said they were already reviewing scenarios of a Greek insolvency. On Thursday, Merkel reiterated her message, saying "our main concern is the stability of the euro."

Papandreou backed down after Merkel and Sarkozy threatened to freeze an €8 billion aid tranche until the referendum had been concluded. The Greek prime minister faces a crucial vote of confidence on Friday evening.

As the uncertainty over Greece's future worsened this week, the debt crisis in Italy also intensified. On Thursday, Merkel made clear to the Italian prime minister that he needed to accelerate his planned austerity measures. Later that night, a draft of the G-20 closing statement emerged including language with Italy agreeing to come close to balancing its budget by 2013. G-20 leaders also pressured Berlusconi to agree to have Italy's progress in implementing savings measures and reforms monitored by both the International Monetary Fund (IMF) and the EU.

In addition, a number of Italian media reports are suggesting Berlusconi's government in Rome could be close to collapse.

German editorialists on Friday look to the latest developments and conclude that the European debt and euro crisis has escalated to a dangerous new level. Some argue that the only hose left that is big enough to fight the fire is the European Central Bank with its money printing machines.

Business daily Handelsblatt writes:

"No matter who takes over the rudder in Athens, Europe shouldn't expect much. Rather, it should prepare for even greater chaos."

"Instead of simply accepting the aid package ... offered, thus demonstrating political leadership, Papandreou suggested to his countrymen that they had a choice. The bitter truth, however, is that there is no choice -- a truth the Greek prime minister heard with perfect clarity from Merkel and Sarkozy on the French Riviera, where he had been summoned to appear. Either Greece accepts European help, was the message from the EU crisis summit in Cannes on Wednesday night, or Greece has to leave the euro zone."

"With this unprecedented ultimatum from EU leaders, the common currency endgame has begun. Even if the referendum does not take place, the damage has been done: For the first time since the founding of the currency union, the exit of a member state is no longer mere speculation, it is an official alternative."

"(Were that to happen), the effects would not just be felt in an impoverished Greece, rather in the EU as well. Were Greece to be the first 'sinner' to leave the euro area, despite years of assertions to the contrary, attention would immediately move on to the next weak link in this chain. Were Italy and Spain to become endangered, an uncontrollable domino effect could begin -- which may in the end reach France."

"Whether the Greeks leave the euro zone in the end or not -- neither alternative will calm the situation."

Conservative daily Die Welt writes:

"At the end of the eventful day, the redemptive message came: Papandreou would withdraw his referendum because conservative Greek opposition leader Antonis Samaras declared he was ready to vote for the aid package with the government and take part in an interim national unity government. At the very last minute, and after two years of refusals, the opposition party (ND) finally showed a sense of responsibility."

"But the reasons behind this welcome development did not lie in Athens, but in Cannes. There, Merkel and Sarkozy beg the house when they took the Greek prime minister to task. They didn't just say that payments to Greece would stop until the Greeks made it clear they would hold up their end of the bargain. They also insisted that the Greek referendum would essentially be a vote on Greece's membership in the euro zone -- the really big question. The politicians in Athens decided they'd rather not take the risk."

The conservative Frankfurter Allgemeine Zeitung writes:

"Until Thursday ... one thing had never been questioned -- namely whether an overly indebted euro zone member, regardless what happens, would still belong to the currency union. The subject of a withdrawal or expulsion was always a taboo. The fact that the European treaties neither envisioned the one scenario or the other was the very least of the reasons for that."

"But this taboo doesn't exist anymore. The German chancellor, the French president and the Luxembourgian chief of the euro group no longer rule out what only a short time ago wasn't even allowed to be considered: that Greece will have to leave the currency union if it can't adhere to its agreements on consolidating its budget. Merkel, Sarkozy and Juncker appear to have run out of patience. The predicament Athens is clear to them and they do not underestimate what the Greek people are having to cope with. But their own voters are breathing down their necks."

"Regardless of whether the (inevitable) breaking of a taboo serves as an effective intimidation strategy or not, European politics have arrived on virgin soil. From now on, the order of the day will no longer be increasing the number of member states and transferring ever more competencies to the EU. From now on, the dismantling of institutions and duties will no longer be ruled out -- either because the voters will it or because objective contradictions exist that can no longer be simply resolved with existing methods. The dangers therein are obvious. It could become a slippery slope and once things start moving it may be hard to stop them. Still, this massive Project Europe, a unique undertaking of organizing peace and prosperity under the shared exercise of sovereignty, is experiencing a major crisis of confidence. Perhaps it is now time to give a radical signal with the goal of protecting it in its entirety from greater damage."

'The Rescue of the Euro Zone Has Failed Epically'

The center-left Berliner Zeitung writes:

"The rescue of the euro zone has failed epically. The conditions (Merkel and Sarkozy) have imposed on the Greeks show just how dramatic the situation has become. No more money will flow (to the country) until it is certain that the savings program will be carried out. If it doesn't? Then the euro will collapse and Greece will have to exit the currency union. Would Europe then collapse, too?"

"Regardless how the Greek drama ends, it has been clear since Wednesday night that confidence in the euro has been further seriously damaged. This is because the message sent by Merkel and Sarkozy in their urgency was that the euro zone is not only not going to cover the debts of its members -- but that the euro has not been planned for the long run."

"The countries seeking to rescue the euro need to be considering now how they will solve the euro zone's main problem: how they will restore trust. More is needed to accomplish this than just the bailout tools approved on Oct. 26. They won't even suffice to nurse the consequences of an orderly insolvency of a euro country. To save the entire euro, much more is necessary: euro bonds, common taxes -- something that will send a strong message of political confidence to angst-riddled investors that the rest of the euro zone wants to remain together and wants to become even more tightly bound."

The center-left Süddeutsche Zeitung writes:

"Neither Europe nor the euro will go down because of Greece alone. The fact is that the fate of the community will be decided in its founding nations. As all the spectators look spellbound towards Athens, the real finale in the European debt crisis has already begun a few hundred kilometres away: Independent of the Greeks, the Italians will determine whether the euro and the union survives. As painful as it might be for Europe, it could still withstand a (provisional) departure of Greece. But beautiful, proud Italy, on the other hand, has much more decisive dimensions: 60 million inhabitants, the third-largest economy in the euro club and €1.2 trillion in debt. The club would not be able to shoulder an Italian insolvency --neither politically nor economically."

"The crisis in Italy is acute and dramatic. Blame can be squarely cast on the disastrous Berlusconi government. Amidst the chaos in Greece, the fact has almost been lost that Italian Prime Minister Silvio Berlusconi has only partly recognized his country's need to conduct austerity and reform measures. He may have admitted out of necessity recently that the Italians live a little bit beyond their means, but that apparently hasn't given the bustling politician any reason to act. He presented an austerity plan in the summer and he brought a few pages with a handfull of proposals to the euro summit last week, but financial industry executives were quick to say what they thought of them: nothing. When Rome floated a bond last week to finance its debt, its interest rates rose to record levels."

"That is fatal. Already highly indebted Italy is having to take out ever greater loans in order to payback the old ones. The vicious cycle has begun and it will get faster and faster so long as Berlusconi doesn't save and reform."

The leftist Die Tageszeitung writes:

"How do you create a 'firewall' in Europe? How do you protect Italy and Spain from being driven to a state of bankruptcy? This question is unbelievably explosive -- particularly if you look at recent news, as unlikely as it may seem at first glance. On Thursday, the major French bank BNP published its quarterly report and disclosed that it had sold a large share of its Spanish and Italian bond holdings -- despite the enormous losses of capital and write downs that entailed. The Paribas action made clear that, by now, Italian government securities are considered to be junk bonds that must be dispensed with quickly."

"The development suggests that Italy is close to bankruptcy given that the country has a national debt of €1.9 trillion that must be regularly refinanced. But what bank is going to buy Italian government bonds if its competitors are selling them?"

"This danger is far greater than some theoretically conceivable development, as climbing risk premiums being demanded for Italian government bonds show. The euro zone is facing a crash -- and it may come now rather than at some point many years down the road. It is entirely inconceivable that the euro would survive if Italy and Spain topple."

"So what can be done? One thing is certain: Despite its recent €1 trillion in leveraging, we can forget about the EFSF backstop fund. Investors don't have faith in it; otherwise they wouldn't demand constantly increasing interest rates on Italian and Spanish bonds. The last thing remaining for a rescue is the European Central Bank. Like the US Fed, it could purchase unlimited amounts of government bonds until the panic among investors quiets down. That's precisely what Obama proposed during his meeting with Chancellor Merkel in Cannes."

"The chancellor has declined because she knows most Germans wouldn't accept having the ECB 'print money'. But the chancellor and Germany need to know: That is the cheapest solution. A crash of the euro would be infinitely more expensive."

-- Daryl Lindsey

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