‘The Rescue Package Has Bought Nothing But Time’

Thursday, May 13, 2010
By Paul Martin


With the massive 750 billion euro rescue package, the European Union is hoping to reinvigorate the ailing euro. But not everyone thinks it can be done. German commentators on Tuesday voice their doubts.

The euphoria on the markets was hard to miss on Monday. Just hours after the European Union cobbled together a massive €750 billion ($955 billion) package to prop up the euro, stock markets jumped, the euro rose against the dollar and interest rates on Greek bonds — thus far one of the key indicators in Europe’s ominous debt crisis — fell sharply.

Day two, though, has seen doubt gain ground as analysts and investors wonder whether the package, which also foresees the European Central Bank buying state debt from European countries, will actually bring the euro back to health.

Christoph Schmidt, head of the economic research institute RWI, told the tabloid Bild that European governments “have merely bought themselves time, nothing more.” He added that the package was missing clear measures for helping heavily indebted euro-zone countries reduce their sovereign debt, a problem seen at the root of the common currency’s current difficulties.

Wolfgang Franz, head of the German Council of Economic Experts, which advises the government on economic issues, told the Berliner Zeitung that the package pushed through early Monday morning will not provide the euro with long-term stability. The first priority, he said, was “putting out the fire. Now it is time to focus on cleaning up — starting right away.”

The markets seem to agree. After Monday’s rally, the German stock exchange on Monday was back below 6,000 points and the euro had fallen below $1.27 in morning trading after briefly topping the $1.30 mark on Monday.

German papers on Tuesday take a closer look at the package.

The conservative daily Die Welt writes:

“(What happened on Sunday) shows precisely the dilemma that Chancellor Merkel and Germany are stuck in. We cannot assert our culture of stability. … The euro zone is dominated by states that don’t care as much about the stability of the common currency. … What was carved in stone the day before no longer has any validity. And nothing symbolizes this more than the (ECB’s) loss of independence. The separation of powers between monetary and political policy in Europe is now a thing of the past.”

“It is getting harder and harder to believe in the euro project. If the heads of government respond to the crisis in the appropriate way, it might still be possible to forge a stable currency union…. But, in order for that to happen, you first have to have a fundamental mindset change in almost all of the euro-zone states. It’s much more likely, however, that politicians will take a deep breath and refrain from making tough budget cuts and instituting the reforms called for in the stability pact. If that happens, €750 billion will no longer be enough. Thus, the rescue package has bought nothing but time. And, at the moment, no one can say just how much.”

The center-right Frankfurter Allgemeine Zeitung writes:

“As was the case when they bailed out the banks, the governments of the EU member states are hoping that the sheer size of the €750 billion rescue package they are jointly launching with the IMF, the European Commission and the ECB will convince the financial markets that they should no longer question the solvency of individual euro-zone countries. But how believable is the claim that no euro-zone country is indebted enough to be allowed to drop (out of the currency union)? Likewise, can you really bail out countries in the same way you do banks … ? How much sovereignty are democratic states willing to give up in return for such support, and what type of resentments will savings measures imposed from above elicit? The fact that the markets are celebrating doesn’t answer this question and is not a sign that people will put their faith back in the euro for long. What’s novel in this case is the relief it provides to creditors; they’re getting off scot-free thanks to taxpayers in the euro zone.”

The Financial Times Deutschland writes:

“(The ECB’s decision) shows that it has given in to massive political pressure. On the long term, it could lead to problems. But, on the short term, it was the only correct move.”

“By agreeing to buy bonds, the ECB is mitigating the most urgent liquidity worries in the market and sending a signal to both investors and speculators. To investors, it signals that they no longer need to fear a collapse in prices; to speculators, it signals that it’s not worth it to bet on this happening. The decision doesn’t save the euro yet, but it does set the preconditions for that to happen.”

“For the foreseeable future, the euro-zone countries and the ECB will be following a rational course. Euro-zone governments must now really make sure that everyone in the euro zone gets their budget deficits under control. And, for its part, in agreeing to buy bonds, the ECB has lost a bit of independence that it must win back as quickly as possible. Part of doing so is putting an end to the state of emergency that has been called as swiftly as is economically feasible. Failing to do so will preserve unhealthy incentives: If states know that the ECB will keep buying their bonds whenever they encounter problems, they are not forced to have hardly any restraint in taking on new debt.”

“The real test of the ECB’s independence will come farther down the road, when it is forced to raise interest rates in order to keep the value of the currency stable and prevent the economy from overheating. Given their massive state debts, governments will have an interest in keeping interest rates low for a long time. It will only be when the ECB ignores this desire that it will demonstrate that it has regained its freedom from politicians.”

The center-left Süddeutsche Zeitung writes:

“€750 billion, that is a huge sum. Euro zone countries and the IMF want to guarantee members who run into trouble on the credit markets to the tune of €750 billion. It is a number that one will often see written out with all the zeros in the coming days. It is large enough to infuse respect, even fear. It seems reasonable to ask: What’s going on here? And, who is in control of this game?Phantasies of world (or euro) demise seem to be in great demand.”

“The fear is intensified by the lack of understanding about that which is taking place in the financial markets. Conspiracy theories everywhere: ‘The markets’ are acting crazy; ‘the speculators’ outfitted with ‘gigantic computer programs’ have been set free. They are ‘betting against Greece’ or even ‘against the euro.'”

“There are no evil speculations at work here, nor is there a mega-gambler like … George Soros, who allegedly brought the British pound to its knees (always an exaggeration). Rather, there are just small and big investors. Some of the hedge funds were indeed bigger, but they didn’t invent this game on their own. They are like professional surfers, who know how to catch the wave at the right moment. But they didn’t make the wave.”

The website of the influential weekly newspaper Die Zeit writes:

“Europe will remember this moment in the spring of 2010 for a long time to come. The Greek lies, the chuminess of other euro zone countries, the fright spread by the financial markets with their increasingly unscrupulous bets on the Greek state’s eventual bankruptcy. For a dramatic moment, it looked as though the fate of the entire European Union — a historically unprecedented work of over 60 years — was hinging on a thread from some dubious rating agency.”

“That we Germans — and 14 other euro zone states — have to pay for Greece, or at least provide it with guarantees, is bitter. And it’s far from a foregone conclusion that the fright will not return. But there’s another aspect that Europeans will look back on one day. The developments of recent weeks have shown just how advanced European integration has become over time — and not just on the paper of treaties in Brussels. It may sound like a paradox after all the disputes, but Europe has been pulled closer together by this crisis. That closeness was recognizable when, on May 1, unions across Europe protested and German workers lively debated the Greek pension system. Germans are torn between their solidarity with their colleagues in Athens and their anger over the fact that they have to support Greeks who get to retire a lot earlier than their German counterparts. The demand is clear: ‘If we have to pay for you, then you will have to work as long as we do.'”

“For years, the debate over unified European social standards has been the exclusive domain of leftist European think tanks. Now the debate is being conducted on the streets of Germany, France and Greece. … Another example is the state election in North Rhine-Westphalia. The issue of whether Merkel delayed aid for Greece because of the election has been the subject of passionate discussions everywhere from London to Bratislava to Prague. Britain’s Economist criticized Merkel as decisively as Stockholm’s Svenska Dagbladet. And this criticism wasn’t without echo in Germany — indeed, the election gained a new issue.”

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