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March 30, 2012 7:29 pm
Europe warned crisis not over yet
European finance ministers were warned on Friday that the underlying causes of the continent’s debt and banking crisis had yet to be resolved, as Spain, struggling to rein in its fiscal deficit, published its most austere budget since democracy returned after the Franco era.
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Two confidential analyses prepared by European Union officials and distributed to ministers meeting in Copenhagen said €1tn in cheap loans to banks provided since December by the European Central Bank had provided a reprieve, but sovereigns and financial institutions needed to use the relative calm to shore up finances and balance sheets.
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“Contagion may ... re-emerge at very short notice, as demonstrated only a few days ago, and re-launch the potentially perverse triangle between sovereign, bank funding risk and growth,” one of the analyses, prepared by the EU’s economic and finance committee and seen by the Financial Times, said. The existence of the documents was first reported by the Italian daily La Stampa.
The reference was a clear allusion to the recent sharp rise in Spanish borrowing costs, which have hovered near 5.5 per cent for more than a week. Eurozone and Spanish officials have launched a two-front offensive in an attempt to prevent the country becoming the next crisis victim.
In Copenhagen, ministers agreed to increase the ceiling of their two bailout funds to €700bn, an attempt to erect a firewall big enough to convince markets the EU can protect Spain. In Madrid, the government announced €27bn in benefit cuts and tax increases as part of the toughest budget since the death of General Francisco Franco in 1975.
As part of what Cristóbal Montoro, the budget minister, referred to the “the biggest fiscal consolidation of the democracy”, €12.3bn will be raised in new taxes, with €5.3bn coming from corporate taxes, and €2.5bn projected to come from a temporary amnesty on tax evasion.
Other savings will come from cutting ministry budgets by almost 17 per cent to €65.8bn this year. The foreign affairs ministry is hardest hit, losing 54 per cent of its funding. Industry and agriculture both lost just over 31 per cent each.
“We are convinced that Spain will no longer be a problem, especially for the Spanish, but also for the European Union,” Luis de Guindos, finance minister, said.
The warning on the fragility of the European recovery undercuts optimistic rhetoric by government leaders. Nicolas Sarkozy, French president, this month said the eurozone had “turned the page”, and Mario Monti, his Italian counterpart, this week said the “financial aspect” of the crisis had ended.
However, senior officials at EU institutions – particularly the ECB and the European Commission, the EU’s executive branch – have been more sanguine, warning the ECB’s long-term refinancing operation has bought time but cannot replace reforms in national economies and the financial sector.
The second document, which was prepared by the Commission, warned bluntly: “The euro crisis is not over. Many of the underlying imbalances and weaknesses of the economies, banking sectors or sovereign borrowers remain to be addressed.”
The paper argued the elements of the recent restoration of confidence – finalising a second Greek bailout, increasing the eurozone’s rescue fund, EU-wide bank recapitalisation, new eurozone fiscal discipline rules, and efforts to pass policies to encourage growth – must be fully implemented or leaders risk losing their last chance to act.
“If this window of opportunity is not most effectively used we might have missed the last chance for a considerable amount of time,” the analysis said.
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Copyright The Financial Times Limited 2012.
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