Our crisis tracker boils the flood of euro-zone news down to the handful of questions that, each week, will most determine the fate of the European currency union.
Week beginning September 24, 2012
Will Greece get the funding it needs?
Likelihood: Still unclear
Why it matters: Greek officials have promised €11.5 billion ($15 billion) in spending cuts over two years in return for continued access to bailout loans totaling €240 billion. After weeks of intense negotiations over what to cut to appease international lenders (the European Commission, the European Central Bank and the International Monetary Fund), the so-called “troika” called a week’s or more hiatus to regroup.
That’s bad news for Greek politicians, who are trying both to hold together a fragile government coalition and to appease the populace. Prime Minister Antonis Samaras has fought for two weeks to build consensus over austerity cuts with both coalition partners and international lenders. But there have been massive anti-austerity street protests by police officers, military personnel, doctors, and judges, who all stand to lose out. More than half of the proposed budget cuts are to pensions, wages and benefits. Without further aid, Greece risks defaulting on its debt, being expelled from the euro zone, and suffering swift economic collapse. Officials denied a report over the weekend (German) in Der Spiegel, claiming that according to preliminary findings of the troika, Greece’s budget gap is more like €20 billion.
What to watch: Greece’s two biggest trade unions are staging general strikes on September 26. Greece’s finance minister, Yannis Stournaras, meets with his European counterparts on October 8 to present austerity plans in detail. A final decision about Greece’s fate should come on October 19 at the European Union summit. Reuters reported Friday that there may be no resolution until after the US elections in November, but Greek officials denied that report.
Will Spain’s prime minister request more rescue aid?
Likelihood: Pretty likely
Why it matters: On September 6, European Central Bank (ECB) President Mario Draghi said the bank would buy unlimited amounts of government bonds from ailing economies if they applied to the euro zone’s bailout fund and stuck to strict conditions. Spain was among the intended recipients. But ever since, prime minister Mariano Rajoy has been stalling—partly from an unwillingness to accept strict conditions that come with the funds.
But also because he can afford to wait. Paradoxically, Draghi’s bond-buying offer bought him time as markets reacted favorably to a show of ECB support and drove down Spain’s borrowing costs. Two successful bond auctions followed, bringing in billions more and delaying the need for quick action. Reports surfaced late last week that despite Rajoy’s insistence that Spain would not need a bailout, government officials have been in talks with European Commission officials over a new rescue program, and have an economic reforms plan ready in case of an immediate bailout request. An announcement could come as early as this week.
What to watch: On September 28 Spanish officials are due to share a review of the country’s banking sector and its recapitalization needs. The figure is likely to be more than €50 billion to clean up messy bank balance sheets. Watch also for a new economic reform plan from Madrid that will probably come out in the second half of the week.
If Spain accepts Draghi’s bond-buying offer, will Italy follow suit?
Likelihood: Still unclear
Why it matters: Spain and Italy were the intended recipients of the ECB’s unlimited bond-buying offer, but Spain has been the one in the spotlight. That is, until last week when lousy economic data showed that business activity in the euro zone had contracted at its fastest rate since June 2009. Suddenly, attention shifted to Italy where reports emerged that Europe’s third largest economy would shrink by 2.4% for 2012, twice as much as expected, while the country’s budget deficit would would increase to 2.6% from 1.7%. Investors started questioning whether Italy, like Spain, should accept Draghi’s bond-buying offer. The pressure has been less on Italy than Spain because Italian yields have been more stable since Draghi’s promise to do whatever it takes within the bank’s mandate to protect the euro.
What to watch: Jens Weidmann, Germany’s Bundesbank president meets Vittorio Grilli, Italy’s minister of economy on September 26. The ECB’s unlimited bond-buying offer will probably be discussed. Weidmann was the only ECB Governing Council member to oppose the program for both Italy and Spain. On Friday, Mario Monti, the Italian prime minister, meets Rajoy and other centrist political leaders where the topic is sure to be discussed.
Will Europeans leaders reconcile differences on banking union?
Likelihood: Still unclear
Why it matters: Leaders have agreed in theory to allow regulatory oversight by the ECB of 6,000 euro zone banks. The move, part of a larger European Commission (EC) plan for banking union, is viewed as crucial to stabilizing the euro and preventing past banking problems from recurring.
But now even the so-called single supervision system is in jeopardy. Lines are being drawn between those countries such as France that want ECB oversight of all 6,000 banks agreed by January, and countries like Germany, that want to give the ECB oversight only over significant and cross-border banks, and don’t want to rush into anything. The Germans are concerned about potential conflict of interests arising from the ECB’s control over monetary policy and supervisory matters.
Each day banking union seems to grow more distant. Now even the ECBs role as the main supervisor is up for debate. Michael Grosse-Broemer, chief whip of German Chancellor Angela Merkel’s conservative government, has said the existing European Banking Authority, a European agency that supervises national banking regulators set up in the wake of the 2008 global financial crisis, could be reorganized and its activities increased to do the job instead.
What to watch: Expect more chatter from eurocrats and politicians making their cases in the press. It is unlikely we will hear of any real progress before euro zone finance ministers meet on October 8.