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January 11, 2012
If someone is getting paid for borrowing money, something is quite clearly not right. And that's exactly the case on the financial markets at the moment. When German bonds worth almost four billion euros ($5.1 billion) were offered on Monday, there was so much interest in them that some of the potential buyers were prepared to waive the interest and even offered to pay a premium to get the bonds.
Germany, a safe haven? Many investors do seem to consider it the last bastion of the crisis-rattled eurozone. The economy is humming, unemployment is declining and the citizens don't seem overly concerned either. Also, doesn't it seem to be the case that where eurozone debt is concerned, all roads to lead to Chancellor Angela Merkel's offices in Berlin?
As 2012 gets underway, Europe's political and economic leaders are queuing up in Berlin again, awaiting an audience. French President Nicolas Sarkozy was first in line, meeting Merkel on Monday.
Tuesday was the turn of the head of the International Monetary Fund, Christine Lagarde - although Lagarde and the German chancellor's office both declined to comment on details of their discussions after the event. Like a host of European national governments, the IMF has contributed billions towards the emergency loans packages for Greece, Ireland and Portugal.
Relatively new Italian Prime Minister Mario Monti is set to meet Merkel on Wednesday and explain his plans to tackle the country's national debt and avoid a threatened downgrade to Italy's credit rating.
Tense situation
Having dominated the news for so long, talk of Europe's deepening crisis was put on ice over the festive period and the New Year - but while even political leaders need to unwind for a few days occasionally, that did nothing to dispel the difficulties. The situation in Greece remains so tense that no one would truly be astonished anymore if the country were to abandon the euro and return to its old currency, the drachma.
Over the weekend, it was leaked to the press that the IMF apparently had serious doubts about the viability of Greece's rescue plans. The next meeting of the so-called Troika - the IMF, the European Commission and the European Central Bank - to examine the reform steps taken by Greece is set to take place in mid-January. It's believed that the Greeks will need to find many further savings, and according to the rumors, the IMF's Lagarde does not believe that Athens will manage it.
That appraisal would not be music to Merkel's ears. The chancellor is keen to keep Greece within the European single currency, as is her French counterpart, Nicolas Sarkozy.
In Paris, Sarkozy is fighting on multiple fronts - with securing reelection in April understandably topping the president's "to do" list. As a result, Sarkozy has one simple wish: no more catastrophes between now and then. If Greece were to lay down its arms and bow out of the eurozone, that would only be akin to a thunderclap - the storm would arrive thereafter.
What if Greece does fall?
Merkel and Sarkozy have made it clear they intend to do everything in their power to keep Greece afloat - but it's still not clear how that can be achieved. The politicians have hinted that their talks with banks, asking them to voluntarily write off some of Greece's debt, will soon be concluded. By March, at the latest, Greece is set to require roughly 130 billion euros more in loans.
But it will also need a green light from the Troika before the cash can be dispatched - and what happens if that is not forthcoming? Will Greece fall, and what impact might that have on other countries?
Hungary is also on the brink of bankruptcy, a situation that's being closely monitored in Austria, which has invested heavily in its eastern neighbor. And let's not forget the other European causes for concern, namely Italy, Spain, Portugal and Belgium.
Mario Monti's government in Italy had to offer interest repayments of almost seven percent in order to secure its latest set of loans. This year Italian bonds worth over 300 billion euros will mature and have to be repaid - presumably using fresh credit. The first 20 billion euros will have to be refinanced this week. If investors continue demanding seven percent interest for the fresh funds, Italy will be on the road to ruin.
Monti is therefore expected to plead for help from EU partners when he visits Berlin on Wednesday, seeking to reassure them in return that he is making progress domestically. It is true that he has imposed an austerity package on his people that can only be described as drastic.
More growth, more jobs
Europe will not escape its debt crisis, however, with spending cuts alone. IMF boss Lagarde has already predicted that 2012 will be a tough year for the global economy, and there are very few who disagree with her. In a situation of stagnancy or recession the red pen, if applied too liberally, can often prove destructive.
Chancellor Merkel seems to be aware of this. As well as advocating that tougher rules on overspending be anchored into the European Constitution, she is also calling for a second front, focusing on supporting economic growth and job provision. Her third, perhaps somewhat forlorn, hope is for a greater sense of optimism.
After the dark year of 2011, 2012 is supposed to bring big decisions and a turn towards the positive. This might help explain Merkel and Sarkozy's announcement in Berlin on Monday that the eurozone could go it alone with a tax on financial transactions.
The next EU summit is slated for January 30, and it will have to deliver substantial results to impress the financial markets. Merkel, Sarkozy, Lagarde and Monti - like their colleagues around the continent - know this all too well. They have seen how little value the markets placed in December's "historic" EU summit. Investors are still skeptical, and so long as they remain that way, eurozone politicians are liable to remain stuck in this downward spiral.
Author: Sabine Kinkartz / msh
Editor: Chuck Penfold