Today, Europe’s leaders are gathering in Brussels to try and draw a line, once and for all, beneath a sovereign debt crisis that has been dogging the Eurozone since 2009. It has been described in the media as a “make-or-break” summit, where either the crisis will be solved and markets will return to normal, or there is a growing risk that the Eurozone might start to come apart at the seams. Understandably, European leaders have been keen to play down expectations for tonight’s summit.
We recently looked at what a collapse of the Eurozone might look like, and we’ve also debated the effects of Germany leaving the Euro and a Greek default. Greek blogger Protesilaos Stavrou contributed a comment to Debating Europe arguing that it is “all or nothing” when it comes to the Eurozone. Any moves toward a partial break-up of the single currency would result in the whole thing collapsing in on itself.
Severing a part of this ‘organism’ will doom both the part and the whole just as if a vital organ is removed from the human body where both eventually die. The reason that is true is because the country that opts out will trigger a chain reaction in the banking sector and in all other sectors it can influence, which will see private banks and other corporations falling one after the other just like in a domino. Moreover the markets will begin to speculate over which will be the next country to exit, there will therefore be immense speculative pressures which will eventually drive more countries out until the point where the currency union collapses, leaving behind chaos and severe open wounds.
Debating Europe recently spoke to Paul Taylor, European Affairs Editor for Reuters, about the crisis. He explained that there is an emerging consensus that Greece will need to have a severe write-down of its debt, but the problem is that politicians are trying to do the impossible. They want the write-down done on a voluntary basis, but they also want to avoid tax-payers having to take losses and they also want to avoid the European Central Bank (ECB) having to take losses – and achieving all three will be very difficult.
We also spoke to Tony Barber, the Financial Times Europe Editor, and asked his take on events. He insisted the chances of a Greek write-down were now “100%” and the question was now about avoiding contagion and preventing a Greek restructing from becoming a “credit event” that triggers the kind of Credit Default Swaps (CDS) that caused so many problems during the 2008 crisis.
Finally, we spoke today to Professor Jörg Rocholl of the European School of Management and Technology, and asked him what he expected to come out of today’s meeting:
There are three measures that will probably come out of this meeting. The first will be that there will be a more substantial involvement of the private sector in Greece – meaning bigger ‘haircuts’ for investors. Second, there will be a more extensive firewall, so the leverage of the EFSF will be substantially increased. The third part will be the recapitalisation of Europe’s banks to the tune of about 100 billion Euros.
Does he think these measures will be enough to finally draw a line under the crisis?
On the first point, the private sector involvement in Greece – even if it’s a haircut of 60% – in my view is not enough because the overall debt level in Greece is too high. Even a substantial haircut to those holdings will not be enough to bring Greek debt to a sustainable level. More of this will follow. Even a haircut of 80% or 90% on private banks might not be sufficient.
On the second point, the ring-fencing or the creation of the firewall in order to avoid contagion certainly may work, if there is a really credible signal sent out that the debts of other countries are to be protected. At the same time, it may also lower incentives in some countries to achieve sustainable budget situations. In that sense, there could be an over-reliance on other countries to step in.
I view the key question as being whether Italy, and to a lesser extent Spain, will be able to get out of this crisis on their own. Because if Italy cannot reform on its own, this means these different rescue packages would not be sufficient and the numbers involved would be too big for Europe to handle – with France, and even Germany, risking the loss of their AAA credit ratings.
What do YOU think? Do you have confidence that Europe’s leaders will be able to come to a solution? Or do you believe that they will continue to “muddle through” and “kick the can down the road” until it’s too late? Can European economies push through reforms in time? Let us know your thoughts in the form below, and we’ll take your comments to policy-makers and experts for their reactions.