The EU’s house of cards

What a weekend this is going to be. Or not. Angela Merkel and Nicolas Sarkozy have said that EU leaders won’t be able to produce a bailout plan for the eurozone by Sunday, after their much anticipated weekend summit. Instead, they will only be able to come up with a plan after another summit on Wednesday.
 
The Sunday meeting, as some will recall, had already been delayed for exactly the same reason. The euro nations can’t agree — or, more precisely, the lynchpin nations of Germany and France can’t agree — on how to use the €440 billion bailout fund. They can’t see eye-to-eye on how much to boost it by either, and apparently the Bundestag doesn’t want to increase it at all. There is even confusion over Greece’s exact debt levels, with the increasingly comic troika of the ECB, IMF and the European Commission unable to agree on whether Greece can make good on its obligations.
 
We have reached the theatre of the absurd, and it would be funny if it weren’t so frightening. And even if a ‘definitive agreement’ — whatever that means — is reached on Wednesday, what then? All this is happening even as Portugal is now likely to join Greece and Spain in failing to keep within its deficit target, Italian bond yields have shot back up, and Moody’s has warned it may put France’s AAA credit rating on negative. In this strange twilight world we’re all now inhabiting, people are rejoicing because Germany’s Ifo business index isn’t quite as bad as feared. 
 
But a truly scary prospect is raising its head — that of a sovereign debt downgrade spiral. Today S&P said it’s likely to lower the credit standing of five European nations, including France, by one or two notches if the region slips into recession and government borrowings rise. The entire eurozone bailout effort is based on the premise that the more creditworthy nations are able to help the lesser; if the creditworthiness of stronger nations such as France is in question, the edifice falls apart. 
 
When the US credit crunch occurred in 2007, it was a massive headache because of the complex system that the financial industry had become: credit lines snaking from one bank to another and back again, a regulatory system that partly worked and partly didn’t, derivatives with exotic names that few knew the purpose of. Today, we have the same enormous credit overhang — but with the added weight of the EU machinery. The EFSF (not to be confused with the ESFS, which is the European Science Fiction Society), the EIB, the ESM, the EFSM: all these are caught in the fabric of the problem. When you pile on the unavoidable political differences between eurozone member states — it’s a wonder things are only coming to a head now.
 
For years, the eurozone has existed in a never-never land of free-market economics within a huge bureaucratic framework maintained between politically sovereign nations. Now the whole thing may go bust. Nobody, least of all the leaders, appears to know how to fix this, or even what is really going on.
 
Only one thing is definite: it’ll be the people standing at the sidelines, perplexed — the public, the taxpayers, us — who will pay.