They stand united, but they will fall divided

Philip Salter
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SUCCESS was declared at the weekend, as European politicians came to an early agreement on increasing the size and scope of the European Financial Stability Facility (EFSF). In response, the euro rose 0.7 per cent against the dollar on Monday to $1.40, while yields have fallen in the peripheral bond markets of Greece and Ireland. However, this glimmer of hope is likely to be only the briefest of respites, with voter sentiment turning away from euro-solidarity and politicians across the continent standing on platforms that threaten this temporary accord.

As a short-term fix, allowing the EFSF to spend its total €440bn on buying bonds directly from governments, while easing the terms of Greek rescue loans has worked. The markets were not expecting an agreement to be worked out until later this month. Alistair Cotton of Currencies Direct says it “calmed very volatile eurozone capital markets”, buying Ireland and Greece time to get their houses in order. Rishi Patel of Fair FX goes further, arguing that “not only has the EFSF created the stability the eurozone so desperately needed, but that it also makes a case for the euro to be a global safe haven currency.”

But despite the short-term respite that the EFSF affords, there are systemic problems that have yet to be dealt with. For Cotton, huge public sector debt in Greece and massive private sector liabilities in Ireland and Spain have yet to be addressed. He also points out that not enough reflection has taken place on factors like the negative real interest rates that were coming out of the European Central Bank during the boom. Angus Campbell of London Capital Group suggests “there is still no guarantee that either country will not default on their loans”, while “there is also still the chance that Portugal or even Spain might need a bailout.”

Politics threatens to upset the applecart. An unlikely broadside might come from Finland, where the anti-euro True Finns party are expected to come to power on 17 April. Timo Soini, its leader, is not keen on the bailouts, or the euro for that matter, philosophising that “if a melon and an apple each wear the same size baseball cap, everyone can see that just doesn’t work.” Chancellor Angela Merkel, despite insisting upon severe terms in bailouts, is still out of favour with the German public. Losing the Hamburg regional election might be repeated in three more state elections this month. Also, following the Japanese earthquake, the German public is even more likely to turn against their pro-nuclear Chancellor. Portugal is also likely to throw up its own troubles. Elections will probably be called with the main opposition party, Partido Social Democrata, refusing to consent to Jose Socrates’s cuts.

The debt crisis will not be solved with more debt and nothing announced so far is going to stave off the troubles on the tracks. Voters of nations on the brink of bankruptcy are not happy paying the bill, while those being asked to help are equally disobliging. The current batch of politicians might be keen to defend the euro project at any cost, but the next lot look a lot less cooperative.