So the European Commission announced that Spain and Portugal will not be punished for breaching Europe’s Growth and Stability Pact. The decision lands yet another blow on the credibility of the European project. How many more punches can it take? And will the political turf wars of European politicians make matters even worse?
Spain and Portugal violated the rules of the Growth and Stability Pact, which stipulates that EU countries may not have budget deficits and national debts in excess of 3 per cent and 60 per cent of Gross Domestic Product, respectively. Spain and Portugal are both wildly off the mark.
The two countries, hit hard by first the financial crisis and then the eurocrisis that started with Greece, have been fighting hard to climb back out from the abyss. Unemployment numbers in the countries are sky-high, while economic growth is still lackluster and by no means sufficient to lift the unemployed out of poverty.
And so Spain and Portugal were penalized. They were handed fines -- penalties easy enough to pay, though. Indeed, the fines levied were €0 and €0. According to sources cited by EurActiv, this came after German Finance Minister Wolfgang Schauble called some European commissioners from his Christian-Democratic European People’s Party and asked them politely to get Spain off the hook.
Spain is incidentally still run by the Partido Popular, which in Europe is part of Schauble’s EPP. Spain has held two national elections in the past six months; the Partido Popular has not been able to win back a majority. There is no doubt that a hefty fine would have reflected badly on the staunchly pro-EU Christian-Democrats, while a third national election is a serious possibility.
Could there have been a trade-off? Spain’s caretaker government consists of Christian-Democrats. The other country that was let off the hook, Portugal, is run by Socialists. Could that have been the calculation -- you get to save your Socialist friends, we get to save our Christian-Democratic friends?
Yes, it’s speculation, but this mechanism is played out nearly daily in the European Union, where the Christian-Democrats of the EPP, the Socialists of the Alliance of Socialists and Democrats, and the Liberals of the Alliance of the Liberals and Democrats Europe stare each other down in an endless Mexican standoff.
Knowing that these party politics often force tough decisions, the spotlights will move to Rome at the end of this week. There, center-left Prime Minister Matteo Renzi is in a tough spot.
Several large Italian banks seem destined to fail stress tests to be published on July 29. The results are expected to show that, among other banks, Monte dei Paschi di Siena is loaded with debts it cannot repay. Many of these are loans taken out by Italians themselves. Unfortunately, banks like Monte Dei Paschi financed the loans disbursed by taking out loans from other banks, such as French banks. Italian banks are thought to be in the tank for billions to their foreign counterparts.
Until recently, national governments would pick up the tab. Spain is a prime example. There, billions in non-performing loans were stashed in a so-called bad bank, Sareb, which now holds mortgages and the like from nationalized banks.
Sareb is backed by Spanish government funds. This is no longer allowed.
One recurring event that has seriously ticked off voters throughout the European Union has been the rescue of failing banks using taxpayer money. Europe’s leading politicians realized this very negative sentiment was starting to eat away at the popularity of the European cooperation project as a whole and so they decided on a new policy of so-called bail-ins.
Instead of governments bailing out failing banks -- and then those governments being bailed out by aid from other countries using money from taxpayers -- those holding the bad loans would have to bleed first.
So companies and citizens will pay up to 8 percent of the outstanding loans, after which a government is allowed to step in.
The Italian prime minister is in a tough spot: With Italian banks teetering, Renzi is not allowed to engage in a classic bail-out while also not allowed to somehow funnel money from the government’s coffers to the banks -- that would mean a breach of the Stability and Growth Pact.
He has already lost local elections, some in large cities. He is facing more such elections and on top of that a national referendum on the reform of the Senate, which he also made a referendum on his own leadership by announcing that he would resign if he loses.
If Renzi is forced to confront voters with the bill for bailing in Italian banks, he is sure to face voter fury.
At the end of this week another such blow awaits, when those stress tests tomorrow reveal the financial health of Italian banks.
European Socialists don't want to lose their man in Rome. The question is what they have to trade in order to save him.
