Europe’s Crises Are Back!
After an August spent frolicking on the warm beaches of Greece and Spain and sipping chardonnay on the sunlit steppes of southern France and northern Italy, Europeans have now returned to work—and to a month that promises to be the antithesis of relaxing and stress-free.
For Europe, and the rest of the world, September will likely be marked by extreme stress, severe financial convulsion, and intense political debate and bickering. The next few weeks will be tumultuous and transformative, and will quite likely determine the fate of Europe.
So, as September kicks off, here are four major events you need to pay close attention to.
1) German Constitutional Court Ruling
On September 12, Germany’s Constitutional Court will rule on the legality of Germany’s participation in the European Stability Mechanism (esm). Established in the wake of the 2008 debt crisis, the esm was designed to collect funds from eurozone states and then disperse money to struggling states. Although it collects money from numerous European states, the esm is worthless without Germany’s checkbook.
Most analysts expect the German high court to approve of Berlin continuing to contribute to the esm. Many, however, expect the court to impose strict conditions on Germany’s participation. “The German Constitutional Court sees itself as the guardian of a certain idea of Germany—small, stability-minded, and inwardly oriented—and court watchers expect a ‘yes, but …’ ruling that stipulates that the red lines of German democracy have been reached,” explained Tyson Barker in Foreign Policy last week.
Whatever the specific conditions imposed by the court, they will undoubtedly compel the German government to protect and further Germany’s national interests, and to extract concessions from eurozone states that the Berlin-led esm might be forced to rescue. A “yes, but” decision from the court will elicit two general responses from Europe. First and most unlikely, ailing European states could flatly reject German/esm assistance on account of its imposition on national sovereignty. This would be a decision that effectively amounts to national financial suicide.
Second, and more likely, eurozone states could simply capitulate to Berlin’s demands and sign away sovereignty in return for sorely needed cash.
Either way, a “yes, but” decision by Germany’s Constitutional Court will augment Germany’s position at the center of Europe’s debt crisis.
If Germany’s Constitutional Court says no to Germany’s participation in the esm—a decision Moody’s says is 40 percent likely—it would gut Europe’s current bailout infrastructure. A negative ruling, reported Reuters, “would cast the 17-nation European single currency area into turmoil, spurring panic on bond markets,” and quite likely precipitate a major political and financial catastrophe.
2) Dutch Elections
On September 12, at exactly the same time that Germany’s Constitutional Court is making its pivotal ruling, the Dutch will be electing a new government. This too, could prove hugely important for Europe’s future, and especially the German-led axis of northern European states that has dictated the management of the eurozone crisis.
As Barker notes, the Netherlands “is one of the small economic powerhouses that has aligned itself with Germany—[it’s] tough-minded but traditionally somewhat pro-European.” Since Europe’s debt crisis began, the Netherlands, together with Finland and other northern European states, has solidly supported the German solution of demanding more austerity. That is, until recently.
Over the past few months, the Dutch have grown increasingly disconcerted and frustrated with Berlin’s approach to the eurozone crisis. Many don’t like the imposition of austerity measures. The economic picture for the Netherlands is darkening; its economy shrunk by 1.5 percent in the first six months of 2012 and unemployment is rising. The economic malaise, which is mild compared to that of Greece or Spain, has boosted the popularity of some of Holland’s anti-Europe political parties ahead of next week’s election.
In particular, watch the Socialist Party, led by Emile Roemer. As Barker notes: “The far-left Socialist Party (SP), which is currently leading in the polls, says it would flout EU budgetary rules, call for a referendum on the recently signed EU fiscal pact, oppose rescue packages for Greece, and roll back the ‘Berlin consensus’ economic policy built on hard money, tight fiscal controls, and structural reform.”
In all likelihood, the electoral success of the Socialist Party (and other marginal parties, such as Geert Wilders’s Freedom Party) will necessitate the cobbling together of some sort of coalition government. Whatever new government forms, it is likely to have a formidable Euroskeptic contingent. Such a contingent will make it more difficult for Amsterdam to quickly and simply endorse Germany’s approach to the eurozone crisis.
If the Netherlands diminishes its support of German leadership, and possibly leads the way in a northern revolt against German stewardship, the pressure on Berlin will quickly intensify. The growing Euroskepticism among northern European states means Germany’s window of opportunity to solve this crisis by integrating further is fast closing.
3) Spanish Bailout
On September 14, two days after the Dutch elections and German court ruling, eurozone finance ministers will meet to discuss Europe’s outlook, and specifically that of Spain. “Following the meeting, Spain could well become the fourth country in the eurozone to seek assistance from its neighbors,” reported the Wall Street Journal yesterday.
The situation doesn’t look hopeful. Writing in the New York Times Monday, Landon Thomas Jr. noted that growing numbers of Spaniards are cashing out and fleeing the country ahead what they believe is an inevitable crisis (emphasis added):
In July, Spaniards withdrew a record €75 billion, or $94 billion, from their banks—an amount equal to 7 percent of the country’s overall economic output—as doubts grew about the durability of Spain’s financial system. … According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted. That is a 25 percent increase from a year earlier.
Spain is hemorrhaging money. Investors, banks and the general public are pulling their cash out of Spain. At this rate, the equivalent of the entire annual output of Spain’s economy is leaving the country every six months.
That’s unsustainable. “Our economics team believes that Spain will not be able to avoid a full-blown bailout,” wrote financial services conglomerate Nomura in a research note.
With that kind of money leaving the country, Spain’s currency would be collapsing if it were outside the euro, the Nomura note points out. Of course, if it were outside the euro, it might not be in this situation.
Compounding Spain’s problems, its regions are also struggling. Spain has set aside €18 billion to bail them out, but it’s becoming more obvious all the time that it will not be enough.
Spain is due to pay around €20 billion by the end of October. It’s running out of time to come up with that money. The nation is teetering on the brink of needing a bailout. It will probably be pushed over the edge in September.
Spain’s economy is five times larger than Greece’s. Bailing out Greece strained Europe. Bailing out Spain promises to force some even more radical changes.
On September 12, or sometime soon after, the European Central Bank (ecb), the European Commission and the International Monetary Fund (imf) will release their combined assessment of how well Greece is doing at keeping its promises to impose austerity. The report comes ahead of the decision by Germany and others of whether to give Greece more bailout cash.
If the report is positive, which everyone knows is highly unlikely, Athens will be given more bailout money. If the report is negative, and says that Greece has failed to live up to its commitments—which many believe is certain and inevitable—then Germany and its allies will have to decide if they’re willing to continue funneling money to Athens. Chances are, Berlin will say no.
If that happens, the much-talked about Grexit—Greece’s exit from the eurozone—is likely to happen.
The New York Times recently reported that big American banks and consultancy groups have been “doing a brisk business advising their corporate clients on how to prepare for a splintering of the eurozone.”
“That is a striking contrast to the assurances from European politicians that the crisis is manageable and that the currency union can be held together,” it writes. Corporate Executive Board, a private advisory company, reports that four out of five of clients polled expect Greece to leave the euro.
The banks are putting together contingency plans like driving truck or train loads of money into Greece to pay employees as the financial system falls apart.
As these events unfold, they’re likely to be so dramatic and significant they will even make headlines in the mainstream media, perhaps even in America. As the headlines in the mainstream news mount, though, don’t be distracted away from theTrumpet.com. Share this website with your family and friends, with your acquaintances and workmates. Follow us on Twitter, on Facebook. Subscribe to our print magazine.
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