Storm clouds loom once again over the eurozone. Interest rates on Portuguese, Irish and Greek government bonds are continuing to rise. Ten-year bond yields for Ireland reached a record 7.75 per cent on Monday, while for Portugal they were 6.67 per cent. The ECB started buying bonds again after several weeks’ abstention. There was some respite for Greece after helpful results in local elections.
At the political level the Franco-German demand for new disciplines to be inscribed in treaty changes has caused deep concern across the euro area. The proposal to suppress voting rights for offending countries provoked particular anger, although that idea has now been dropped.
Just to unnerve both markets and politicians still further is the suggestion that new government euro bond issues should specify that in the event of a default investors who hold the stock would take a “haircut” and get back less capital than they originally invested. In other words there would be no guarantee for investors that the bond would pay back its full face value. German finance minister Wolfgang Schäuble tells all in a revealing interview in this week’s Der Spiegel.
It’s a far cry from the early days when all euros were born equal and a Greek bond was just as sound as a German bund. It also seems a much more explicit recognition of the possibility of default by eurozone members. It could even trigger a member country to quit altogether.
In presenting the recent report of the European Council Task Force on Economic Governance Council President Van Rompuy stated that Europe had this spring “won the battle of the euro”. Well maybe, but the markets are not convinced. Many share Samuel Brittan’s view in the November 5 Financial Times that the eurozone is condemned to collapse: “that which is unsustainable will not be sustained”.
The open question is whether the imposition of strict budget disciplines on eurozone members will be enough to keep all the passengers on board in the face of slow or zero growth in their economies. Is it a recipe for convergence or divergence?
The Task Force looks ahead to 2013 when the €440bn European Financial Stability Facility expires. Its proposals once adopted should mean a continuing squeeze on the budget deficits of eurozone member states, although ECB president Jean Claude Trichet doesn’t like it because it gives too much say to ministers. The penalties for running up unacceptable levels of debt would be severe, but not automatic.
Treaty change will apparently be needed for the new measures. The very idea caused much dismay when the Germans first made it, with the battle scars of Lisbon still fresh in many countries.
However, Van Rompuy is expected to suggest using the Simplified Revision Procedure set out in Article 48 paragraph 6 of the Lisbon Treaty. This provides for changes which “shall not increase the competencies conferred on the Union”. It requires unanimity in the Council, consultation but not the consent of the European Parliament (can you imagine?) and does not require a Convention and – so it is argued – can be easily ratified by national parliaments. Should be fertile territory for constitutional lawyers!
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July 7, 2022