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Thunder And Lightning over the Euro Area

Published on , , Sofia

On the way to Berlin the plane of French President Francois Hollande was hit by a lightning and he had to return to Paris to change the plane. Ultimately, he managed to see Angela Merkel on Tuesday evening, just hours after officially taking office. As the French president explained to the media, the purpose of the meeting was not to solve all the issues on the table, but the two leaders to get to know each other better, to establish a relationship to work together in seeking solutions. And if there were expectations for a difficult meeting of Mr Hollande with Mr Merkel, both appeared in the Chancellery`s hall, crowded with journalists, while mutually examining one another. After each phrase, there was a look at the other in search of a reaction, in an attempt to foresee emotion.

Both claimed that their differences on key issues, including belonging to different political families, would not hinder their work and Francois Hollande recalled that not for the first time the Franco-German relations would be led by leaders from different political parties - Helmut Schmidt and Valéry Giscard d'Estaing, François Mitterrand and Helmut Kohl, then with Jacques Chirac and Gerhard Schroeder. The tradition of France and Germany to come up with common proposals for European Councils will not be broken and both countries will present their common ideas for promoting economic growth at the EU summit in end-June.

Growth was at the root of Hollande`s statements, who, given the lack of any high political experience, still sounded like at a campaign rally. Growth was his answer too to a direct question of a German journalist whether he would ratify the fiscal pact as it is, which is already in process of ratification, or he would push for amendments. This issue was one of the important points of the campaign of Hollande, a socialist, which caused tension throughout the European Union, global markets and especially in Berlin. The new French president again recalled his election promise to push for an "economic growth dimension" to be included in the treaty. However, he made it clear that a legal possibility would be sought this to be done. "The method that we have agreed is to bring together all the ideas, all suggestions and see how this can be legally implemented. At the end of this process I will be able to answer your question."

The way the French leader responded to this question is extremely important at this very moment and it confirms his words, that France and Germany are responsible for Europe. The new French president stressed that he had arrived in Berlin willing to show that he wanted to work together with the German chancellor in solving problems. The question is what legal option can really be found, given that the ratification procedure has already begun - in a few days Ireland is to hold a referendum on the current wording of the treaty and it is difficult even to think of a second referendum on an amended text. Most likely small changes would be made, such as those made at the beginning of the reforming of the EU economic governance, which do not require referenda.

The storm

Although Angela Merkel saw a “good omen” in the lightning that struck Hollande's plane, the "lightnings" falling over the euro area hardly bode something well for the currency union. The epicentre of the storm still is Greece, where the prospect for the radical left to win the new election on 17 June raised the stakes for the country's exit from the eurozone. As you know, the party is a staunch opponent of the rescue programme and wants to renegotiate it. Angela Merkel, however, was adamant that "the memorandum must be respected." Francois Hollande shared the same opinion but promised European support for economic growth in Greece.

But everything is in the hands of Greek voters, who claim they want to stay in the euro area but are opposed to the rescue programme. This is not possible, as was explained in a simple manner by German Finance Minister Wolfgang Schäuble, quoted by The Financial Times: “It’s a form of irresponsibility. One cannot have one’s cake and eat it. That is what the entire international community, and all Europeans, have told the Greeks very clearly. Now it is up to Greece to take the decision itself.” The rescue programme is not something imposed on Greece, Schäuble said, rejecting the possibility of a renegotiation. He explained that governments and parliaments of 16 countries took part in the rescue of Greece and they had to conduct many debates to explain why it was both right and necessary to do so. Nobody wants Greece to leave the eurozone, Schäuble reaffirmed.

The same message was sent by the eurozone finance ministers too, after their meeting on Monday (May 14th) evening. Eurogroup President Jean-Claude Juncker defined the debate about a Greek exit of the euro area as "nonsense" and "propaganda". But according to the IMF managing director, Christine Lagarde, this option should be “technically” considered, although "it is something that would be extremely expensive and would pose great risks". "If the country's budgetary commitments are not honoured, there are appropriate revisions to do, which means either supplementary financing and additional time or mechanisms for an exit, which in this case must be an orderly exit," Ms Lagarde said.

The FT reported of massive outflow of funds from Greek banks due to fears of an impending return to the drachma. And the rumble of the Greek storm has already resonated quite strongly on the Iberian Peninsula, where markets are anxiously monitoring the situation. Madrid has nationalised the country`s third largest bank Bankia and has adopted a plan for banking sector recovery worth over 50 billion euros. Meanwhile, the yield on Spanish debt keeps growing, touching the critical level of 6.5% that prompted the bailout countries Greece, Ireland and Portugal to request financial assistance.

Prime Minister Mariano Rajoy warned that the country might lose access to the financial markets or be forced to borrow at astronomical prices, if he does not continue cutting costs and reducing the public deficit. And if this happens, asking for bailout will be inevitable. Spain is the fifth European economy and its share in euro area GDP is 10% (Greece, Ireland and Portugal have a total of 6%). A year ago, experts estimated that saving Spain would cost 700 billion euro - an amount under the pressure of which the so-called "firewall" of the euro area (both the temporary and the permanent rescue funds), amounting to 800 billion euro, will just collapse. But the consequences of such a move would be far heavier than purely financial, as the loss of confidence in the euro will be irreversible.

And if there is still hope that the Spanish government will be able to pass the austerity measures and to contain market pressures, there is almost no chance Greek voters to support the pro-European parties which adhere to the bailout programme. However, it depends on them to disprove me.

Although the storm in the eurozone did not spare even the first cross-border flight of the new French president, his meeting with Merkel, the body language and their timid smiles showed that at least the Franco-German engine of the monetary union and the EU is not damaged so far. There could be a delay while the two leaders adjust to each other, but it seems that both are aware what is at stake and are willing to concessions. These expectations could be confirmed at the informal dinner of the EU leaders on 23 May. From what they will present together we will understand more about the future of the Merkollande team and Europe as a whole than from their first meeting.

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