Nobody Won in the Non-Final

By Ferdi De Ville

The Dutch were most clamorous, even a little arrogant, but eventually played no role and had to slink off. The English played defensive, achieved a minor success but were other than that largely ignored. Super Mario defeated Germany. Spain was the winner in the end.

For a euro-outsider, it must have been difficult and confusing during the past three weeks to distinguish the sports from the political headlines, to know when one was talking about the Euro Summit or the Euro Championship. Many comparisons between the football game and politics in Europe have been made over the period. Maybe the best one, was the following (illustrating the fallacy of composition in the argument that the rest of Europe should copy the German export growth model): in the Germany-Greece game, the Germans secured two-thirds possession of the ball, why couldn’t the Greeks do the same? Other analogies were hypothetical or indefinite. Was Germany kicking out Greece from the tournament in the quarter finals the forerunner of what inevitably will happen within the eurozone? Did the Germans lose two times from the Italians on the same night, first being eliminated by Mario Balotelli, and later defeated during the marathon-negotiations by Mario Monti?

Yes, as the last comparison makes clear, for all the nice metaphors, a crucial difference remains between football and politics. While in football it is clear who wins (if necessary after penalties), this is much less straightforward in politics. In the first hours after the Euro Summit agreement was reached, many, not least in Germany, deemed that Merkel had lost. However, this judgment has changed over the weekend (read for example FT’s Wolfgang Munchau). On Der Spiegel Online on Friday 29th June even two contradictory articles appeared, one entitled ‘How Italy and Spain Defeated Merkel at EU Summit’, the other ‘Merkel’s Tactical Victory: Smart Concessions from a Seasoned Negotiator’.

These conflicting verdicts are understandable. They depend upon one looking at the broad principles or the nitty-gritty details (or lack thereof) decided at the summit. On principles, it is true that some important changes have been decided, that look like giant concessions from the German side because they imply further joint liabilities. In the future, banks in trouble may be recapitalised by the European Stability Mechanism and the same ESM may buy government bonds of solvent and responsible countries that are nonetheless faced with runaway bond rates. However, the banking union will only come into effect after joint European oversight by the ECB has been established. And while countries may now receive ESM assistance without having to undergo humiliating troika screening, they will still have to sign a memorandum that will clarify their obligations in exchange for financial assistance. Thus, the German principle of ‘no joint liability without joint oversight’ has been upheld, while no further money has been allocated. The German negotiators did better in Brussels than their compatriots at the football pitch in Warsaw, pocketing at least a 2-2 draw.

This devil in the details is not only relevant to decide upon who won at last week’s summit, but also to decide on the success of the outcome in solving the euro crisis. For now, it seems that financial markets have welcomed the agreement rather positively. However, they have done so after several summits in the past, only to find the weak spots in the solutions some days later, leading to a further escalation of the crisis. This should certainly not be ruled out this time. It remains to be seen when (and if) the new European banking supervision system will come in place, allowing Spain to transfer the debt associated with recapitalising its banks to the ESM. But, more importantly, it has been noted by Paul De Grauwe that the ESM is much too small to perform its newly granted functions of bank recapitalisation fund and pro-active lender-of-last-resort for sovereigns, and that his may even accelerate the run on Spanish and Italian bonds. Only the ECB can act as a credible lender-of-last-resort and put a cap on bond yields of responsible sovereigns.

Thus, the euro crisis is for the nth time not solved after the umpteenth ‘summit of the last chance’, although especially the decision to cut the lethal link between national governments and national banks is an important step. It will, however, become clear that the ESM will need to be boosted, and that in the end it might only become credible with a banking license that allows it to tap into the unlimited resources of the ECB. This would boil down to Eurobonds in all but name, something that Angela Merkel has ruled out during her lifetime. In the meantime, the ECB might lower its interest rate, and maybe restart its Security Markets Programme, buying Spanish and Italian bonds on the secondary market.

We can expect the ECB to be more accommodating now that the Fiscal Pact is being ratified, and the euro-zone member states have agreed to make progress to implement Van Rompuy’s roadmap to full economic (including fiscal, financial and political) union to complement the monetary pillar. This was requested by ECB president Mario Draghi, who was one of the four drafters of the ‘Masterplan’. His co-ownership of this plan might render him more lenient in providing politicians with (much) time-as-money to establish this full economic and monetary union.

This plan finally looks like a strategy, a long-term vision that is rather the biggest than the smallest common denominator between German (and northern) and French (and southern European) interests and preferences. It is still too much focussed on austerity, and it lacks a real growth and social component. If the eurozone leaders could add these dimensions and agree on this strategy later this year, they might finally begin to resemble the Spanish squad: playing disciplined yet forwardly.

If one thing is certain, it is that last week’s summit was not the final of the euro crisis. And that nobody won, neither Merkel, nor Monti, Rajoy or Hollande. And also not the euro. While the European Championship (and football metaphors) ends here, this blog will thus go on.

Dr. Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.