MUNICH - Slovakia votes yes – but so what? The European Financial Stability Facility (EFSF) not only has a complicated name, it has a complicated structure. The bottom line, however, is that it’s all up to Germany and France. If either loses its top AAA rating, it would spell the end of this 2010 emergency mechanism to respond to the euro zone debt crisis. And to make sure that doesn’t happen, Germany’s federal government will have to accept some bitter compromises.
One thing’s for sure: the euro zone breathed a collective sigh of relief when Bratislava finally overcame their internal squabbles to vote “yes” to expand the EFSF.
That calmed European government fears ahead of a summit meeting later this month. And some top officials are now acting as if the EFSF is some kind of new miracle instrument for all the euro’s woes. In a show of union and confidence, the hope is that the good news will act rather like a Valium on anxious citizens and nervous markets.
But look a little closer and it very quickly becomes clear that there is no way the EFSF can accomplish a miracle. Act as a tranquilizer, buy time, shore up a couple of small euro countries or their banks, yes: that it can do. Shore up a big euro country? No. And that’s not necessarily because of the amount of money the EFSF has at its disposal – it has to do with its structure.
The EFSF can only work if Germany and France, the two largest economies in the currency zone, maintain their Triple-A standing with the rating agencies. Berlin and Paris’s AAAs guarantee that same rating for the fund itself, thus enabling it to do its job. If either country loses their top grade, the EFSF implodes. And if that happens, it could spell the end of the euro. That’s where the danger lies.
Closer than ever
In the worst crisis in its existence, the euro union is dependent on one small fragile instrument that additionally could become vulnerable to varying national interests. To be sure, until now domestic euro conflicts have only caused national collateral damage of fairly manageable dimensions. Governments changed in Ireland and Portugal; Slovakia’s will now change as well. In Germany, there was some disagreement among the parties, but at the end of the day the coalition approved the EFSF. In France, approval came without much discussion.
But beneath all the current consensus are lurking worries. Acting as guarantors for the EFSF - and thus the euro itself – has linked Germany and France closer than they’ve ever been since the start of the currency union. So it all depends on the two countries putting their joint interest in the euro over their national egos.
Practically, what that boils down to is that Berlin and Paris, at the next meeting of euro zone bosses in Brussels, will once again have to try and put their pure national interests aside if necessary. They will have no other choice. In the interests of Europe and the euro, both countries have to do everything in their power to avoid the risk of hitting the radars of the rating agency.
So Germany is going to have to accept the fact that France is against too great a reduction in the Greek debt, and doesn’t want banks on shaky ground to receive government bailout money, but get it directly from the EFSF. Anything else would mean that French debt levels would rise so significantly that the rating agencies could downgrade it.
And Paris is going to have to learn to live with the fact that the Germans want private investors to share the cost of the crisis, and that the European Central Bank can’t be turned into a money printing machine. And France will also have to understand that at some point things are going to get dangerous if they keep expecting what is presently Europe’s strongest economy – Germany’s – to keep paying for everything. The rating agencies know full well that Germany‘s economy, while strong, isn’t strong enough to rescue the euro singlehandedly – aside from the fact that its citizens wouldn’t stand for it.
Anyone looking for a full picture of just how dramatic the situation is can play this little game. Take the hypothetical case that France’s banks needed to be stabilized to the tune of many billions of euros, and that as a result Paris couldn’t meet its austerity goals. Thumbs down from the rating agencies. The EFSF would also be reviewed and probably lose its top grade. That would force big investors, like retirement funds or insurers, to invest in German government bonds instead of the ESFS – retirement funds, for example, are only allowed to buy top-graded bonds. The EFSF would no longer be what it’s supposed to be.
The alternative doesn’t look a lot better. Germany could of course raise its already massive guaranties in order to ensure a top rating for the EFSF. But that would mean that the countries of northern and central Europe were basically carrying the euro: the south from Greece to France would be split off, and the currency union torn.
So it’s still way too early to breathe easy for the ultimate fate of the euro.
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