Approaching Fall

by Ferdi De Ville

Slowly but surely everyone is returning from the summer holidays and getting back to business. For politicians and observers involved in the euro crisis, the long vacation was more tranquil than expected. The open-return flight tickets of politicians did not have to be used preliminary and observers could feel increasingly relaxed at not looking at their smart phones for some time. This welcome time-out was to a large extent thanks to the famous ‘it will be enough’ speech held by Mario Draghi at the end of July in which he declared that the ECB would do everything that is within its mandate to safeguard the euro; including interpreting that mandate broadly.

However, the coming weeks and months promise to be very hectic again. Eurozone leaders will have to be creative once more in developing solutions to unexpected crises and observers will need to learn to understand and use the acronyms and expressions the decision-makers come up with (I recently added OMT and sterilisation to my euro crisis dictionary). Let me use my first blog after the break to set out what is to come and to be expected in the first months of the second half of this year.

September has begun with, again, all the spotlights on the ECB President who outlined the details of its bond buying programme. Judged by the positive reaction by markets and most observers (and the absence of negative reactions by eurozone heads of state or government), it seems that the euro has convincingly taken this first post-summer hurdle. This measure may make what is to come also more manageable. And lots is to come, all steeped in uncertainty.

On 12 September, the Dutch hold general elections on the same day that the German Constitutional Court is to decide if the European Stability Mechanism and the Fiscal Compact violate German basic law. It is widely expected that Karlsruhe will not obstruct the euro crisis resolution, but the details of its argumentation may further limit the manoeuvring room for Merkel. The Dutch elections are unpredictable, the latest polls forecasting that a part of the electorate is returning from the political extremes to the centre. Anyhow, it will be important for the further course of the crisis if the next Dutch government will be more or less flexible towards further support for ailing countries. If, after Finland, the government will further harden its stance, it might become extremely thorny for the eurozone to find the necessary compromises in new emergency situations that will surely pop up in the coming months.

In the beginning of October the troika will submit its new report on Greece on which the extension of its support programme (and thus its survival as a euro member) depends. Much speculation and diverging statements have already been made in anticipation of this report (examples here and here).

In the meantime, it is much expected that Spain will in one way or another have to apply to the rescue mechanism. This has the positive effect of making it eligible for ECB support, but the downside is that it will be subjected to strict conditions that may cause further domestic social unrest. Italy still seems to have a chance to escape this scenario, although reform fatigue and political posturing in the run-up to the elections may quickly change this.

Apart from these ‘big occasions’ that may each become a large incident derailing the euro, much conflict can be expected in filling in the details of some important agreements-in-principle that have been taken before the summer. Most important is fleshing out the banking union. A clash between Germany and the Commission is building up, with the first wanting to limit supranational oversight to multinational, systemically important banks, and the second (referring to problematic cases as Northern Rock, Dexia and Bankia) insisting on including all banks. Later in October, Draghi, Van Rompuy, Barroso and Rehn will present their interim report on how to complete the Economic and Monetary Union.

After the presentation of the ECB’s bond-buying plan, my safest bet would be that we are in for a(nother) fall full of mini- and mega-crises and summits-of-the-not-so-final-chance. Problems in (at least) Greece, Portugal and Cyprus will turn out to be worse than currently known (or acknowledged). Spain will have to eat humble pie and Italy will have show uncharacteristic political determination and stability. The space for compromise between German demands and Greek willingness for more austerity in exchange for money is extremely limited. And finding consensus between Germany and France on abandoning economic sovereignty, between the Commission and Germany on banking union and between northern and southern Europe on solidarity and responsibility in fiscal union will be extremely challenging. Every test contains the possibility of failure. But I think the euro will stand not fall. And that, notwithstanding the continuous reciprocal condemnations and provocations, even Greece will still be part of the eurozone when we start the Christmas holidays.

This brings me to the intriguing question, raised by my colleague Hendrik Vos, of when we will precisely decide that the eurocrisis is over?

To be continued.

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.