EUROZONE CALM BELIES BREWING POLITICAL STORM / THE FINANCIAL TIMES COMMENT & ANALYSIS

Global Insight

July 31, 2013 1:14 pm

 

Eurozone calm belies brewing political storm

 

By Peter Spiegel in Brussels

 

Investors appear to have shrugged off peripheral nation turmoil

 

 

Take a quick political stability tour of the eurozone’s southern periphery and it would be hard to argue things have ever been worse since the outset of Europe’s sovereign debt crisis.

 

Greece’s two mainstream parties are now barely clinging to their governing majority, with extremist parties on the left and right polling a combined 40 per cent. Italy’s technocratic government has spent its entire short existence firefighting and seems perpetually on the brink of collapse.

 

Spain is in the midst of a payola scandal allegedly so vast that it would fell any government in a system without Madrid’s iron-fisted party discipline. And Portugal’s prime minister is only able to fend off snap elections by giving authority to deal with bailout lenders to the head of his anti-austerity junior coalition partner.

 

It is a pretty grim survey. And yet, other than a brief wobble at the height of the recent Greek and Portuguese dramas, investors seem to have shrugged it off entirely.

To be sure, both Portugal and Greece are likely to need new bailouts soon since neither is expected to be able to raise enough cash on their own when current rescue loans run out in the middle of next year.

But the lack of wider market turmoil amid the current political wreckage can only mean one of two things: either investors have been lulled into a false sense of security or the eurozone crisis as we once knew it is over.

So is it possible the hair-on-fire first act of the eurozone saga has ended?

Ever since its start, the existential threat to the single currency has mainly come from two separate but related scenarios: a massive bank run by depositors convinced their euros were about to be turned back into drachmas, escudos or pesetas; or Italy losing access to the bond market, making it unable to refinance its massive €2tn debt pile.

Under either scenario, bailouts needed would be so big that there simply would not be enough cash available, forcing massive defaults and a euro break-up.

The idea of a bank run now seems improbable since depositors have shown remarkable resilience despite almost constant provocation.

Just 18 months ago, after then Greek prime minister George Papandreou threatened to put his country’s bailout to a national referendum, EU leaders publicly declared euro membership voluntary by insisting any Greek referendum be an “in or out” vote. In March, they went even further to spook depositors by forcing Cypriot bank account holders to pay for their country’s €10bn bailout.

But neither event, which some predicted would spur lines outside wobbly Spanish banks, caused more than a relatively mild “bank jog”. EU leaders even recently codified the principle that bank bailouts should be paid for by private cash – including, in extremis, bank deposits – despite the continuing questionable health of Europe’s financial system. If none of that has led to bank runs, nothing will.

Which leaves Italy. Despite all that has been done in Brussels – a new €500bn bailout fund, tough debt and deficit rules, a nascent “banking union” – none of it will really save Italy if the markets decide Rome’s debt is unsustainable. The only thing that would remain between Italy and the abyss is the printing presses of the European Central Bank, which Mario Draghi a year ago vowed to deploy.

 

That is a formidable firewall, and Mr Draghi’s bond-buying programme, known as Outright Monetary Transactions, has soothed the markets like nothing else has. But OMT is as much a political tool as a monetary one and can only be deployed if a troubled country submits itself to a Brussels-approved rescue programme first – a programme that must pass muster, among other places, in the German Bundestag.

Which is why the new political turmoil in the south matters.

OMT has never been tested. If one of those governments were to fall and be replaced by anti-bailout populists, the markets will very quickly be reminded that ECB bond buying is not the same as Bank of England or US Federal Reserve bond buying. It is at the discretion of political opinion in already put-upon parliamentarians in Germany and other creditor countries.

So the current calm could mark the end of the beginning. Or it could be a lull before the storm.

 

Copyright The Financial Times Limited 2013.