Policy Makers Struggle to Escape the Tide

“But always at my back I hear / Time’s wingèd chariot hurrying near” wrote the English poet Andrew Marvell in the seventeenth century, when trying to persuade his coy mistress to be more accommodating.

Marvell’s lines sum up rather well the sense of foreboding in the European Union at the start of 2011 as policy makers struggle to keep ahead of the tide of a deeper euro crisis. Will economic growth across the EU be enough to stave off a nasty accident in the eurozone? Is there a common will for decisive action which will bring new confidence to Europe’s financial markets? And will European governments, especially Ireland, Portugal, Greece, Spain – and now poor leaderless Belgium – manage to raise the funds they need at a reasonable cost?

The markets forced big changes in 2010 and will shape the course of events in the eurozone in 2011. When President Barroso was in Budapest last Friday he said that the markets were demanding more co-ordination at a European level. It was not a question of utopia or idealism, he said, but “a matter of realism, sound, solid common sense”. Barroso’s comments focused on the need  to stimulate European competitiveness – and to take note of what the markets were saying.

But the markets have no regard for rhetoric. The next few days will be quite a test, as Spain and Portugal seek to raise long-term funds. As of last Friday Portuguese bond yields had been pushed up to 7.17 per cent, more than 4 percentage points higher than German bunds and the highest ever since the euro was created. This despite the fact that the European Central Bank was buying. This coming Wednesday January 12 will be a critical day. It looks as if Portugal could well be joining Greece and Ireland in the queue for bailout treatment.

Maybe the eurozone will have to depend on the European Central Bank and the Chinese government to support the more vulnerable bond issues. Yi Gang, Deputy Governor of China’s central bank, has assured Spain and others that China is committed to supporting their euro bond sales. But President Trichet has stressed that ECB intervention is designed to keep markets working freely, not to deal with the fundamentals of the crisis which, he says, demand fiercer budget retrenchment by governments.  “Monetary policy responsibility can not substitute for government irresponsibility” he says, in a forthright demand for tough action.

The general mood in bond markets has not been helped by last week’s detailed proposals on EU banking regulation, which would require bondholders as well as shareholders to suffer some of the pain for bank failure which up to now governments have been forced to bear. The Commission’s “haircut” formula is not a new idea, but of course it makes existing bondholders nervous. Although open for consultation, it does seem likely to form part of longer term EU bank legislation.

The Commission stresses that the idea would not apply to existing holdings and it absolutely rejects the idea that the same principle could be applied to holders of sovereign debt.

There were some happy fireworks to celebrate Estonia’s adoption of the euro, but they sparkled in the midst of gloom and tension between Europe East and Europe West. The Poles are furious at the commitment by France, Germany and the UK to freeze the EU budget. Bulgaria and Rumania resent the delay in allowing them to join Schengen. Hungary launches its presidency in the teeth of a fierce attack on Hungarian press control legislation as well as tax measures which appear to discriminate against foreign firms.

Tension between the Commission and the Hungarian government were clearly evident at the closing press conference in Budapest on Friday. Barroso’s closing words were directed to the censorship issue, which he said must be dealt with “to make this presidency a success”.

The Commission will be analysing the compatibility of this legislation with EU law, but I wonder whether specific EU laws have actually been breached. According to reports of the Hungarian measures, a state body nominated by the government party has the power to silence and fine organisations or individuals writing articles, broadcasting or blogging in ways to which it takes objection. If that is the case it would seem to be in contravention, not of any particular EU directive, but of fundamental principles of European democracy.