Do European officials really only have one week to save the eurozone? Italian Prime Minister Mario Monti seems to think so, telling The Guardian. The Guardian reports:
Speaking to the Guardian and a group of leading European newspapers, Monti said that, without a successful outcome at the summit, "there would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries". The attacks would be focused not only on those who had failed to respect EU guidelines, but also on those like Italy, which he said had abided by the rules "but which carry with them from the past a high debt".
Monti warned: "A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth."
Outlining the result of a failure at the talks, Monti said that, faced with creeping economic paralysis, "the frustration of the public towards Europe would grow", creating a vicious circle. "To emerge in good shape from this crisis of the eurozone and the European economy, ever more integration is needed," said Monti. Yet, if the summit failed to resolve the problems quickly, "public opinion, but also that of the governments and parliament… will turn against that greater integration".
Scary as that sounds, I wouldn’t worry much. After nearly three years of watching Europe’s finest muddle through, investors have learned not to expect much of EU summits—pledges to support the euro and a few loose plans to stoke growth, perhaps, but certainly not an instant fix for the peripheral eurozone’s sovereign debt problems. Thus, if this week’s gathering of EU leaders ends up as anticlimactic as previous summits, it’s tough to imagine investors deciding all is lost and markets behaving as Monti described.
As rational and learned as Monti is, I suspect he knows this. So why’d he sound the alarm? Was he trying to spark a panic?
I don’t believe so. I think he only wanted to scare one person: German Chancellor Angela Merkel. She, French President François Hollande and Spanish Prime Minister Mariano Rajoy were in Rome for a pre-summit tête-à-tête with Monti, and the men want to allow the EU’s rescue funds (EFSF and ESM) to purchase Spanish and Italian sovereign debt. They believe it’s the best way to lower Spain’s and Italy’s borrowing costs so each can continue issuing debt on primary markets, but Merkel, thus far, has dismissed the suggestion. I suspect Monti thought scaring Merkel with the prospect of financial panic, deep European recession and a collapsed movement for tighter EU integration would prompt her to change her stance.
If that’s the case though, he miscalculated. Merkel’s not blocking his plan because she doesn’t want to help Spain and Italy—rather, her cabinet, parliament and constituents are wary of assuming liability for any more peripheral debt. And Merkel needs their support, with parliament scheduled to vote on the ESM treaty this week. Her opposition, the Social Democratic and Green parties, are already wary of the ESM—if the treaty is amended to allow it to buy sovereign debt, Merkel may not secure enough votes to ratify it. That would be an embarrassing political defeat, and one she’s keen to avoid a year before her re-election campaign. Thus, her resolve held, and she reiterated her nein to Monti, Hollande and Rajoy’s proposal, saying, “It’s not up for debate.”
Positively for Spain and Italy, however, she may be bluffing a bit. Throughout the past two-plus years, Merkel has repeatedly opposed various measures to help out peripheral Europe in order to curry favor at home, then compromised as needed. Once her parliament passes the ESM treaty, she may find it easier to be flexible. Not that she’ll completely fold—keeping with her typical pattern, she’ll likely drive a hard bargain and ask participating nations to cede some sovereignty over fiscal policy and banking regulation. But Europe’s leaders always seem to manage to cobble together some sort of agreement, and it’s tough to envision them letting this proposal die without a strong effort to compromise.