Europeans Agreed On Measures To End Debt Crisis – Greek Debt Will Be Reduced, Rescue Fund To Be Augmented, EU Banks To Increase Reserves – Yet Serious Doubts About Implementation – Italy’s Ability To Fulfil Obligations Openly Questioned By Partners

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By Paolo von Schirach

October 27, 2011

WASHINGTON – The Europeans –at last– have put together the basic elements of a package aimed at restoring financial stability. Greek bond holders will take a major “hair cut” so that the level of the residual Athens’ debt will be reduced and become (hopefully) sustainable. The big European bail out fund, managed by the ESFF will be increased, while European banks will have to increase their reserves, in order to prove that they will be able to manage unforeseen crises.

Gap between EU members commitments and their ability to implement

So, all is well, finally? Not quite. As always, in EU matters, the devil is in the details. If history is to offer any guidance, in Europe there is usually a significant gap between broad agreements and implementation. And timing of course is another element.

And in Europe the big problem that the media and commentators keep omitting is that there is no European Federal Government that will take responsibility for anything. Let me repeat it: Europe is not a state. Do not be misled by the lofty sounding official denomination of “European Union”. Europe is not a politically unified state. It is a (complicated) set of arrangements among 27 sovereign states. The implementation of whatever is agreed to among the 27 is dependent on the will and good faith of the individual governments of these states.

Italy had to write to the EU that it can be trusted

Take Italy, for example. Prime Minister Berlusconi had to write a letter to the EU that opens with an odd statement whereby Italy is to be trusted to honor its commitments. Now, really. If you have to stipulate, in writing, to your partners that you are an honest guy, this means that they already assume (probably with cause) that you are not. And this shows the nature of the problem. Indeed, EU Commission President Jose’ Manuel Barroso stated that it is imperative for Italy to spell out its commitments regarding healing its own finances in a clear manner and with a precise implementation calendar. Some trust there. And Ezio Mauro, the editor of La Repubblica, an important Italian daily, commented that at this point unreliable Italy is in receivership. It has to be watched over by openly skeptical EU partners.

And, to make matters worse, the Berlusconi Government austerity commitments made to the EU partners have been openly attacked by the domestic oppositions and by all the trade unions who promise open battle against them. Some united Italian front.

And do not forget that Italy is no Greece. After Germany and France Italy is the third largest economy within the Eurozone. If Italy cannot manage to convince markets that its plans can and will its reduce its debt, then Europe’s troubles will not be over.

Are we getting to the end of the EU debt crisis?

With all this, are we getting to this end of this European drama? Well, yes and no. An agreement on reducing the total outstanding Greek debt is good news. And so is the deal about augmenting the size of the EU rescue fund and about larger bank reserves for European banks. (Please do keep in mind that these are the same banks that passed with flying colors a “stress test” only a few months ago). These are all good and reassuring decisions. However, they come late, after months of wrangling, and we have no guarantee of flawless implementation.

Individual EU members are politically weak

Look, if the Italians have to go to their EU partners with a letter in which they have to state that they can be trusted, this shows that the common European ground is shaky. And the fact is that, no, the Italians cannot be trusted, because Italy is a mess. It has a gigantic national debt, a weak economy and it is run by an equally weak Goverment with a razor thin majority, led by a Prime Minister who is on trial for a variety of criminal charges. The opposition demands Berlusconi’s resignation as a condition for supporting the majority’s reform package. This is a government that may be gone tomorrow, while there is no obvious replacement.

Given their internal semi-chaos, will the Italians in the end be able to do the right thing –cut spending, cut entitlements, liberalize the economy– in order to help themselves and Europe at the same time? Who knows, really.

After a two years crisis the Greek people have yet to embrace the new austerity policies

The Greeks have prolonged their own suffering by not doing the right thing. And they have been in this debt crisis swamp, entirely of their own making, since the end of 2009, when they announced to the their EU partners that they had cooked the books regarding the actual size of their deficits and that they were essentially broke. We are now at the end of 2011 and Greece, not at all out the woods, is being rescued once again by the Europeans who fear that a Greek disorderly bankruptcy would be a lot worse than imposing greater losses on banks and other institutions holding Greek debt.

So, luckily for Greece, their EU partners deem that Greece is too big to fail. However, the fact is that Germany and the other wealthier and better managed northern EU countries do not have enough funds (and will) to rescue everybody indefinitely. And this is why the EU authorities ask the Italians to provide a reliable implementation calendar for their promised austerity measures. But, as I said, when you get to the point that you have to ask a key partner to show you that they are serious, it may alreday be too late.

Ten years from now the EU may look different

Given this lack of an even elementary common ground among EU members, I suspect that something will have to give. I would not be surprised if, ten years from now, the EU will look different from what it is today. There are several current members that do not belong.


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