PARIS (Reuters) - Architects and firemen are racing to save the euro zone from destruction, trying to redesign the edifice even as flames are leaping from the outhouses towards the core of the building.
As always since the start of Europe’s debt crisis in late 2009, the builders are working on a different timescale from the firefighters, posing a risk that the house may burn down before new buttresses and extensions are approved and in place.
While investors’ confidence in the ability of European leaders to stem the debt crisis has been ebbing by the day, the redesign now under discussion to strengthen the currency’s foundations will take months, if not years.
After dousing down Greece, Ireland and Portugal, finance ministers of the 17-nation currency area spent the weekend tackling the latest blaze in Spain, an economy twice as big as the three others combined.
They agreed to lend up to 100 billion euros ($125 billion) to help recapitalize Spanish banks while preserving the Madrid government’s access to capital markets.
It was the first time the euro zone had acted preventively to assist a member state before it was shut out of the markets, a shift from EU paymaster Germany’s past insistence that any bailout must be a “last resort” and denoting perhaps a new flexibility in its crisis management - or a realization that acting fast could save money down the line.
If Europe had to cover Spain’s borrowing needs for the next three years under a full sovereign bailout, it would severely stretch the euro zone’s only recently increased rescue funds, especially if Ireland and Portugal need extra help before they can return to the markets as seems likely.
The firemen may have bought some time for the architects. But Greece will flare up anew if radical leftist parties opposed to the terms of Athens’ international bailout win an election next Sunday, or the vote ends in deadlock again.
That could lead to a suspension of aid and a Greek default, raising the risk of bank runs elsewhere which the currency bloc remains ill-equipped to deal with.
To outsiders, it often looks as if European governments are trying to fight a roaring inferno with a garden hose, even though they have plenty of water on the premises.
“Europe is one of the wealthiest parts of the planet,” Canadian Prime Minister Stephen Harper said on a visit to Paris last week. Yet the euro was “kind of a half done project” that lacked the fully empowered central bank, strong government with fiscal authority and banking regulator that should go with a monetary union, he said.
U.S. President Barack Obama telephoned euro zone leaders last week to appeal for swift action to shore up the foundations of their single currency, fearing the crisis may otherwise hurt the U.S. economy and damage his re-election prospects.
European leaders are starting to get the message and the EU’s top officials are working on ideas for fiscal and banking union to put to a summit on June 28-29. But the mechanics of changing treaties and getting up to 27 member states to ratify them are inevitably slow-moving.
European Council President Herman Van Rompuy says they will only be “building blocks”. Detailed plans won’t be ready until October and the German government, in an internal document seen by Reuters, expects agreement on a redesign of euro zone governance in March 2013. That would then have to be ratified by all member states.
That seems like light years given the current state of financial markets.
On the plus side, German Chancellor Angela Merkel, the EU’s pre-eminent leader, has now embraced the need for a much closer fiscal and political union to underpin the single currency.
Berlin has moved in other areas too, agreeing for example to give Madrid an extra year to meet its budget deficit goal of three percent of GDP.
But she is still balking at asking German taxpayers to share more liability by issuing common euro zone bonds or a joint bank deposit guarantee. That would raise constitutional issues and could be political dynamite ahead of an October 2013 election.
Merkel says euro zone countries will have to transfer more national budget sovereignty to European institutions, including the EU Court of Justice, to make such a union work.
That requires treaty changes that will be highly contentious in several countries, notably France and the Netherlands, which voted against a European constitution in 2005 referendums.
Recognition of the need for a much more tightly knit federal core Europe to make the currency work comes at a time when public support for European integration is at a low ebb.
An opinion survey conducted for the Pew Research Center in eight EU countries in March and April, before the latest spike in the crisis, found that euro zone citizens want to keep the single currency but don’t back giving up more sovereignty.
“Europeans largely oppose further fiscal austerity. They are divided on bailing out indebted nations. They oppose Brussels’ impending oversight of national budgets,” said Bruce Stokes, director of the Pew Global Economic Attitudes.
Until Merkel’s recent interventions, no European leader was making the case for a big step forward in European unification. The issue barely figured in France’s presidential election.
The crisis is hugely accelerating the timetable for euro zone reform at a time when economic gloom has sapped citizens’ confidence in Europe and in their own political leaders.
Eleven of the euro zone’s 17 leaders have been swept from office since the debt woes began in 2009, The caretaker Dutch government, which fell last month over an austerity budget, may be next to go in an early election in September.
“Introducing a banking union in the middle of a financial crisis is difficult,” the Dutch Central Planning Bureau, a government think-tank, said in an analysis on the euro zone.
“It’s hard to insure a house that’s on fire. But the fire is at risk of spreading, so it’s better to insure the burning house,” it said.
The mismatch between market impatience and the pace of political change prompted veteran investor George Soros, a supporter of European integration, to warn this month that EU leaders have just three months to save the euro.
European Central Bank President Mario Draghi said market participants were “certainly not incorrect” to express such fears.
“What they do, however ... is that they underestimate the strength of the political commitment by the euro area member countries,” he said.
Additional reporting by Gilbert Kreijer in Amsterdam; Writing by Paul Taylor, editing by Mike Peacock