When the eurozone is marching towards more sustainable deficits, why did the bond markets suddenly pounce on Cyprus, Italy and Spain?
Their public deficits are far from new. The structural weaknesses and the resulting lack of competitiveness of these Mediterranean countries are notorius – and age old old problems they will ultimately have to confront and overcome.
The twin tracks of the Stability and Growth Pact and the Europe 2020 strategy are as true as ever.
After the competitiveness theme, with the Wealth of Nations roundup and Growth and competitiveness: California vs Europe as the latest contributions, I wanted to take a peek at the latest patients destined for compulsory care by the financial markets.
My musings started a series about Cyprus, Italy and Spain in the eurozone crisis (in Swedish, but with a number of links to materials available in English).
Some may prefer a more journalistic approach. Spiegel Online explained the main decisions of the eurozone summit: What Was Decided at the Euro-Zone Crisis Summit (25 July 2011).
Yesterday brought some additions to the emerging picture. Commission president José Manuel Barroso published his letter to the heads of state or government. Despite the economic and budgetary fundamentals, Barroso explicitly mentioned the bond markets of Italy and Spain (as well as other euro area states) as ”a cause of deep concern” for the euro area as a whole.
Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery. Euro-area financial stability must be safeguarded, with all EU institutions playing their part with the full backing of euro area Member States. We need also to consider how to further improve the effectiveness of both the EFSF and the ESM in order to address the current contagion.
Concretely, I would like to call on you to accelerate the approval procedures for the implementation of these decisions so as to make the EFSF enhancements operational very soon. These changes should also avoid introducing excessive constraints in terms of either additional conditionality or collateralisation of EFSF lending. I trust that governments and national Parliaments will rapidly approve these decisions necessary to improve the EFSF flexibility.
I also take the opportunity to urge a rapid re-assessment of all elements related to the EFSF, and concomitantly the ESM, in order to ensure that they are equipped with the means for dealing with contagious risk.
Andrew Rettman on EUobserver noted that the Barroso letter was more outspoken than his earlier press statement. The article analysed the text of the letter and added comments by the Commission spokesperson: Barroso raises alarm about severity of euro crisis (4 August 2011).
EurActiv draws a background picture, with references and links to messages from various European capitals: Barroso asks leaders to stand firm on pledges (4 August 2011).
Ivan Delibasic contributed with another background in New Europe: It's all 'bear' and no 'bull' for Spain and Italy (4 August 2011).
In the European Voice, Simon Taylor offers an account of the Barroso letter: Barroso warns of eurozone crisis spreading (4 August 2011).
Deutsche Welle reported both German disapproval of Barroso's ideas and the downward spiral on bond and equity markets (in German): Barroso befürchtet Ausbreitung der Euro-Krise (4 August 2011.
On the FT Brussels blog, Joshua Chaffin discussed the vicissitudes of politics in Cyprus against the backdrop of the eurozone crisis: How will Cyprus restore its finances? (4 August 2011).
To grow commensurate to the tasks, the European Union (eurozone) needs to become more effective, which in turn requires a union based on the sovereignty of its citizens.
P.S. Great resource: For quality articles and wise comment from the European press, you can follow Presseurop in any of ten available languages.