Thursday, July 12, 2012

Euro snakes and ladders

July 14, 2012

The euro’s agony is coming full circle. What started as a banking crisis mutated into a debt and then an economic crisis. Now, in Spain and Cyprus (and perhaps next in Slovenia), it is back to the banks. Europe’s banking woes never went away: they were just ignored or hidden. Whereas America acted quickly to repair its banks, Europe’s leaders are still arguing about how to fix theirs. Their delay is one reason the euro crisis keeps worsening.

Better late than never, the European Council on June 28th and 29th recognised that weak banks and weak governments were pulling each other down. “We affirm that it is imperative to break the vicious circle between banks and sovereigns,” the European Union’s leaders declared. They resolved to create a single bank supervisor for the euro zone (based on the European Central Bank) and then to allow the euro’s rescue funds to inject cash directly into ailing banks. This would alleviate the burden on Spain and maybe Ireland as well.

The markets rejoiced, briefly. But as so often in this game of snakes and ladders, the leap up was followed by a slide down. Within days Spanish bond yields had again crossed the 7% threshold. For that, blame EU leaders’ love of bickering. Italy claimed victory in a deal to allow the rescue funds to buy its bonds and hold down borrowing costs with few strings attached. The Dutch disputed this. Finland demanded collateral; later it seemed to muse about leaving the euro (officials say comments by Jutta Urpilainen, the finance minister, were mistranslated). For one senior euro-zone figure, these two hawks have become emmerdeurs (a fruitier French word for “pains in the arse”). Meanwhile, Germany and the European Commission contradicted each other over whether Spain’s government would be liable for bank losses once rescue funds took over bank recapitalisation.


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