Euro Has Become Greatest Threat to Continent's Future - Finland is a country that is often held up as a successful model for other European countries, but the success of the right-wing populist "True Finns," who captured 20 percent of the vote in April's parliamentary elections, came as a wakeup call to the political establishment in Brussels. As the skeptics gain ground throughout the EU, anti-European sentiments are growing in even the core countries of the union, like France and Germany. The euro, created with the aim of permanently uniting Europe, has become the greatest threat to the continent's future. A collapse of the monetary union would set Europe back by decades, dealing it a blow from which it might never recover, especially with Europe's position already threatened by the fast-growing Asian economies. How is a fragmented Europe to prevail against this new competition? This is why Europe's politicians want to defend the euro at all costs, and why they are approving one bailout package after the next. They are playing for time, hoping that the markets will settle down and the reforms will take hold. The business community is supporting their efforts, too. In a major advertising campaign scheduled to run in leading publications this week, top German business executives, including ThyssenKrupp Chairman Gerhard Cromme, Siemens CEO Peter Löscher and Daimler CEO Dieter Zetsche, promote the monetary union and insist: "The euro is necessary." They argue that ailing member states must be assisted financially, and that the common currency is "absolutely worth this commitment."
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Tuesday, June 21, 2011
Euro Has Become Greatest Threat to Continent's Future - Finland is a country that is often held up as a successful model for other European countries, but the success of the right-wing populist "True Finns," who captured 20 percent of the vote in April's parliamentary elections, came as a wakeup call to the political establishment in Brussels. As the skeptics gain ground throughout the EU, anti-European sentiments are growing in even the core countries of the union, like France and Germany. The euro, created with the aim of permanently uniting Europe, has become the greatest threat to the continent's future. A collapse of the monetary union would set Europe back by decades, dealing it a blow from which it might never recover, especially with Europe's position already threatened by the fast-growing Asian economies. How is a fragmented Europe to prevail against this new competition? This is why Europe's politicians want to defend the euro at all costs, and why they are approving one bailout package after the next. They are playing for time, hoping that the markets will settle down and the reforms will take hold. The business community is supporting their efforts, too. In a major advertising campaign scheduled to run in leading publications this week, top German business executives, including ThyssenKrupp Chairman Gerhard Cromme, Siemens CEO Peter Löscher and Daimler CEO Dieter Zetsche, promote the monetary union and insist: "The euro is necessary." They argue that ailing member states must be assisted financially, and that the common currency is "absolutely worth this commitment."
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ECB Considers Debt Crisis Greatest Risk To Banks
Now that the Germans and the French seem to be largely in agreement, they merely have to convince the ECB, the most determined opponent to date of the German proposal to require private sector involvement. The Frankfurt-based central bankers fear that this would trigger massive turmoil on the international money markets. In its new financial market stability report, the ECB categorizes the euro-zone sovereign debt crisis as the greatest risk to banks.
Most of all, the ECB doesn't want investors to be forced to write off part of their debt. The monetary watchdogs warn that the consequences would incalculable.
They argue that as soon as the powerful rating agencies gain the impression that the Greek government is not fulfilling its obligations without the complete consent of its creditors, they will have to downgrade its credit rating to D, the lowest level. The letter stands for "default." Even if the maturities of Greek bonds were extended with the consent of the lenders, they would have to be downgraded to a rating of SD, or "selective default."
Either way, under its statutes the ECB would no longer be allowed to accept such securities as collateral in returning for providing liquidity to banks. The consequences would be catastrophic. Greek banks would be largely cut off from the European money cycle and would thus run the risk of becoming illiquid. The Greek banking system would find itself on the brink of collapse.
Paving the Path to Euro Bonds
This is precisely where a compromise proposal that Finance Minister Schäuble plans to present to the ECB and to his counterparts from the euro-zone countries comes in. Under the proposal, if Greek bonds are no longer accepted as collateral following the participation of private lenders, the ECB will simply have to be offered bonds that satisfy its requirements.
A 10-member "Greece Task Force" at the German Finance Ministry has worked out how this could function. The experts propose that the Greek government, in addition to the €90 billion-€120 billion in fresh cash it may receive from the euro-zone countries and the IMF as part of a second bailout, also be given access to bonds issued by the EFSF, the euro rescue fund. It could pass on these securities, which have the rating agencies' highest rating of AAA, to Greek banks, which in turn could use them as collateral to obtain liquidity from the ECB.
The problem is that this measure would make the new bailout package significantly more expensive. To ensure that the EFSF had sufficient funds for the operation, its financial scope would have to be increased so that it could really make €440 billion available, as it was originally intended to do. To achieve this, the member states would have to double the scope of their respective guarantees. Germany, for example, would be liable for €246 billion in the future, instead of the current €123 billion.
The would-be euro rescuers are also considering accessing the so-called Hellenic Financial Stability Fund. This fund, set up as part of the first Greek bailout package in May 2010, contains €10 billion, which could be used to boost the capital of Greek banks in an emergency. The fund hasn't been touched yet.
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