Thread: On the Secret Committee to Save the Euro, a Dangerous Divide

maybe old news, but quite interesting to think that the EURO almost collapse for political reasons

On the Secret Committee to Save the Euro, a Dangerous Divide
By MARCUS WALKER, CHARLES FORELLE and BRIAN BLACKSTONE

BRUSSELS—Two months after Lehman Brothers collapsed in the fall of 2008, a small group of European leaders set up a secret task force—one so secret that they dubbed it "the group that doesn't exist." Its mission: Devise a plan to head off a default by a country in the 16-nation euro zone.

When Greece ran into trouble a year later, the conclave, whose existence has never before been reported, had yet to agree on a strategy. In a prelude to a cantankerous public debate that would later delay Europe's response to the euro-zone debt crisis until the eleventh hour, the task force struggled to surmount broad disagreement over whether and how the euro zone should rescue one of its own. It never found the answer.

A Wall Street Journal investigation, based on dozens of interviews with officials from around the EU, reveals that the divisions that bedeviled the task force pushed the currency union perilously close to collapse. In early May, just hours before Germany and France broke their stalemate and agreed to endorse a trillion-dollar fund to rescue troubled euro-zone members, French Finance Minister Christine Lagarde told her delegation the euro zone was on the verge of breaking apart, according to people familiar with the matter.

The euro zone's near death had stakes for people around the world. A wave of government defaults on Europe's periphery could have triggered a new crisis in the international banking system, with even worse consequences for the global economy than the failure of Lehman.

The dangerous dithering was driven by ideological divisions that continue to paralyze the currency union's search for solutions to its structural flaws. Deep differences on economic policy between Europe's frugal north and laxer south, between Germany and France, and between national governments and central EU institutions hindered an effective early response to the crisis. Only when faced with calamity—the collapse of the euro zone—did leaders put aside their differences and reach a compromise.

Complicating matters: The two most important politicians deciding the fate of the euro often had conflicting agendas—and much at stake personally.
Europe's Debt Crisis

French President Nicolas Sarkozy, known in France as the "hyper-president" for his relentless flurry of new initiatives, faced declining approval ratings as his domestic economic overhaul stalled. The excitable 55-year-old leader saw that Greece's woes could rock the euro zone. Mr. Sarkozy seized on the issue as an opportunity to prove his leadership chops and thus shore up his popularity.

For German Chancellor Angela Merkel, 56, the crisis was the biggest test of her career. A trained physicist known for her cautious, deliberative style, she feared a backlash from German voters and lawmakers, and defeat in Germany's supreme court, if she risked taxpayer money on serial deficit-sinner Greece. Despite pressure from Mr. Sarkozy, she fiercely resisted a quick fix.

When Mr. Sarkozy barreled into one meeting with camera crews and photographers in tow, Ms. Merkel icily ordered the cameras out: "I won't let you do this to me," she said, warning she wouldn't play the part of "the stubborn old bag."

A wakeup call for Greece and the euro. WSJ's Andy Jordan and Joe Parkinson report from Athens on the threat of a potentially contagious debt crisis and the moral hazard of bailing out a country with bad fiscal habits.

Europe eventually did establish a rescue fund in May. By then the price of calm had soared, requiring a pledge of €750 billion. It defused the panic but hasn't snuffed out the crisis: Unsustainable borrowing still poses huge challenges, especially in Greece and Ireland.

The danger of a government-debt crisis in the euro zone began to preoccupy top European policy makers in October 2008. Hungary, an EU member which doesn't use the euro, found itself unable to sell bonds to jittery investors. The EU, using an existing but little-used program, and the International Monetary Fund and World Bank swiftly propped up Hungary by pledging about €20 billion in loans.

But it soon became apparent that the euro zone had no tools to save one of its own. EU treaties made clear the facility used for Hungary was off limits to euro members. For most EU officials, the IMF was taboo, too: Its loans were fine for poor ex-Communist nations, they felt, but not for developed euro members.

In March 2009, French Treasury official Xavier Musca was preparing to step down as chairman of the Economic and Financial Committee, an influential body of technocrats who manage EU economic policy. He briefed his successor, Thomas Wieser of Austria, on the duties. At the end of a long list, he added one more. "Incidentally," Mr. Musca said, "there's a group that doesn't exist."

The secret task force, coordinated by the committee chairman, had been meeting surreptitiously since November 2008 to craft a plan should a Hungary-style crisis strike a euro nation. Membership was limited to senior policy makers—usually just below ministerial level—from France, Germany, the European Commission, Europe's central bank and the office of Jean-Claude Juncker, the Luxembourg premier who heads an assembly of euro finance ministers.

The task force met in the shadows of the EU's many councils and summits in Brussels, Luxembourg and other capitals, often gathering at 6 a.m. or huddling over sandwiches late at night. Participants kept colleagues in their own governments in the dark, for fear leaks would trigger rampant speculation in financial markets.

Potential crisis candidates were obvious: Portugal, Ireland, Greece and Spain, a group of deeply indebted states derisively tagged with the acronym "PIGS" by bond traders.

A Mounting Crisis

Investors' loss of confidence in Greece's debt pushed its bond yields up—and the euro zone to the brink of destruction. Radical EU measures calmed the panic, but worries over public debt have returned.

A gap quickly opened up between Germany, attached to euro-zone rules it viewed as banning bailouts for profligate countries, and France, which wanted greater freedom for national governments to support each other as they saw fit.

A fault line also developed over whether EU institutions should run any bailout operation. The European Commission, the union's executive branch, pushed for a central role in raising and lending funds—and found an ally in France. Germany, wary of a power grab, was deeply reluctant to put its cash in Brussels' hands.

The German finance ministry feared the commission was trying to establish a precedent for centralized European public borrowing, through EU bonds. That would imply Germany, Europe's strongest creditor, subsidizing other nations. Instead, Germany insisted any aid must come via loans by the individual euro-zone members to a stricken country. That way Berlin, writer of the biggest check, could control the process and force a wayward recipient to reform itself.

The philosophical divide among task-force members persisted for nearly a year. Last October, it ceased to be academic.

That month, Greece's newly elected Socialist government declared the country's 2009 budget deficit was heading for 12.5% of gross domestic product—more than three times the previous government's official forecast.

Stunned investors began to dump Greek bonds. Greece faced daunting debt repayments in spring 2010, and it wasn't at all clear if it would have the money to make them.

By February, it became obvious that the 16-nation euro zone would have to do something to address the Greek bond meltdown. The secret task force of France, Germany and EU bureaucrats opened its doors to the rest of the member countries—except Greece.

A summit of EU leaders had been planned for Feb. 11 to mull Europe's long-term economic goals. Governments insisted publicly that Greece was "not on the agenda." The hope, say aides to several European leaders, was that if Europe didn't upset the markets by talking about the matter, Greece might be able to sell enough bonds to escape trouble.

But Greek bond prices—a key measure of investor confidence—began plunging in the days before the meeting. Luxembourg's Mr. Juncker convened an emergency teleconference of euro-zone finance ministers on the eve of the summit. They agreed on a statement to be read at the summit's conclusion pledging "support" for Greece.

In Berlin's austere chancellery building, Ms. Merkel wasn't happy. Her advisers were telling her that Greece's problems ran deeper than a short-term cash shortage: The country was economically uncompetitive and living beyond its means. Without a deep overhaul, a quick-fix bailout would keep Greece afloat for only a few months, they warned. In addition, Germany's supreme court would strike down a bailout, the advisers warned, unless it was absolutely unavoidable.

Deep in the night, Ms. Merkel called other leaders, including President Sarkozy, and made it clear she would veto any promise of aid for Greece unless Athens took much tougher action to cut its public spending and overhaul its economy.

Mr. Sarkozy replied that Greek Prime Minister George Papandreou was already taking brave action.

"Now it is time for Europe to help," he said.
"The financial markets will say this is not a solution," Ms. Merkel told the French leader.

The next day's summit, on a Thursday, was scheduled for 10:15 a.m. at the Bibliotheque Solvay, a historic library on a Brussels hilltop. Late Wednesday, EU President Herman Van Rompuy of Belgium postponed it by more than two hours. Snowy weather was the official explanation given for the delay.

In reality, Mr. Van Rompuy huddled that morning in his office on the fifth floor of the EU's summit building with a few key leaders—including Ms. Merkel, Mr. Sarkozy and the head of the European Central Bank, Jean-Claude Trichet. Other European leaders were cooling their heels at the library. On currency markets, the euro was gyrating in anticipation of a bold rescue—or a bust.

Mr. Sarkozy pushed the chancellor for a clear public declaration that Europe stood behind Greece. "I cannot buy that," Ms. Merkel responded.

Eventually, Mr. Van Rompuy brokered a compromise, in the form of a nine-word sentence tacked on to a statement aides were scribbling out on a conference table: "The Greek government has not requested any financial support." The language sneaked in a back-door mention of Greece, but it conformed to Ms. Merkel's insistence that the country not be offered any help.

She had won the round.

Other European leaders believed Ms. Merkel was playing for time because of domestic politics. Her center-right coalition faced a crucial regional election on May 9 in North Rhine-Westphalia, Germany's most populous state. Opinion polls showed voters were furious about the prospect of bailing out the profligate Greeks.

"It was clear that the election was playing a big role," says the finance minister of another euro-zone country. Spokesmen for Ms. Merkel strenuously deny that North Rhine-Westphalia influenced her tactics on Greece.

The chancellor struggled to rein in speculation about an imminent bailout one Friday in late February, when the head of Germany's biggest bank, Deutsche Bank Chief Executive Josef Ackermann, mysteriously appeared in Athens for consultations with Greek leaders. Mr. Ackermann had an idea for supplying Greece with up to €30 billion of credit—half from Germany and France, half from major European banks.

In a phone call from Athens that day, Mr. Ackermann pitched the proposal to Ms. Merkel's chief economic adviser, Jens Weidmann. The reply: unacceptable. "You cannot tell the Greeks that this is a German government offer," Mr. Weidmann said, fearing the already-widespread impression that Mr. Ackermann was acting as a go-between.

A posse of cameras met Mr. Ackermann when he emerged from the Greek parliament building. "I'm regularly in Greece because I love Greece and the beautiful weather," a grinning Mr. Ackermann said, before disappearing into his armored Mercedes-Benz.

By mid-March, Greek Premier Papandreou was clamoring openly for Europe to reassure markets by putting money on the table. Ms. Merkel went on German public radio that month and said Greece didn't need aid. An upcoming EU summit should focus on other issues—and other European leaders shouldn't stir up "false expectations," she said.

But behind the scenes, Ms. Merkel was starting to take over the contingency planning.

There was one thing the secret task force had agreed on: Europe, not the IMF, would handle any bailout. The German finance ministry felt the same. Involving the Washington-based fund in a bailout of Greece would be an admission of European weakness, Finance Minister Wolfgang Schäuble said publicly. Mr. Sarkozy, Mr. Juncker and ECB chief Trichet all shared that view strongly.

Ms. Merkel, however, overruled them all. Her advisers were telling her that aid to Greece could be sold to her skeptical countrymen only as part of a wrenching IMF program of economic adjustment for Greece. IMF-inflicted pain would also deter other indebted euro-zone countries from seeking aid.

The disagreement came to a head before the broader EU's regular spring summit in Brussels on March 25.

That afternoon, before all 27 leaders gathered, Ms. Merkel met Mr. Sarkozy in one of the many spartan meeting rooms in the EU's warren-like headquarters. The chancellor agreed to announce that the euro zone would rescue Greece if it faced default—but only as a last resort, once Greece had exhausted its access to capital markets. Also, the IMF must be part of any loan package, and the IMF—not the European Commission—should draw up Greece's program of overhauls, she said.

Mr. Sarkozy protested against involving the IMF, whose biggest shareholder is the U.S. government. Europe cannot let "the Americans" decide who gets credit in Europe, he said.

Ms. Merkel put her foot down, insisting that only the IMF had the necessary experience. Mr. Sarkozy, recognizing that Germany's financial muscle was essential for any bailout, reluctantly gave way.

On April 11, with the crisis of investor confidence spreading from Greek government bonds to the country's banking system, the EU finally put money on the table. As Germany wanted, the €30 billion for the first year would come in the form of 15 separate government-to-government loans, while the IMF would lend another €15 billion. Officials hoped the sum, enough to cover Greece's borrowing needs for less than a year, would be enough to calm markets.

It wasn't.

EU Set a Secret Group to Save the Euro - WSJ.com

Originally Posted by Butterfly

It's a central europe union, nothing else

Agree. It is the central European economies who derive the benefits and in turn have to suffer the consequence of over expansion of member states.

The fundamental reason the EU was originally hatched was to develop a trade block to counter US economic dominance over individual central Euro countries.

The rapid expansion and recruitment efforts to add countries did indeed result in a list of countries whose total economic power now rival that of the US. Problem is EU has insufficient central power over member states as is the case in the US.

Greece is only 3% of the European GDP, funny how those investigative Journalists completely overlooked all the US manoeuvres and hedge-fund attacks on the Euro in just the same period, following several big countries announcement's (China Russia) in the end of 2009 that they would move investments from the US bonds to the Euro.

And not forgetting Goldman Sachs (I think it was goldman?) involvement in cooking the Greek books.

The Euro dropped sharply from its highest against the US dollar at the end of 2009 in the first few month's of 2010, but the Greece problem or PIG states is not in itself enough to threaten/break the Euro, it is as stated in the OP weak policy and policy divisions from the leaders in the Euro that are a problem.

Compared to the economic problems of many states in the US (is it 40 states that cant balance their budget), California as a very noteworthy example, the Euro is in reality stronger than the US dollar, only in the US the printing press keeps going and the bonds keep getting sold because of very clever policy's and undermining financial propaganda against the competing Euro.

IMHO.

Originally Posted by Norton

Originally Posted by larvidchr

I would love to see some investigative Journalism into the meetings between Obama, Bernanke and the big US financial institutions in the latter half of 2009.

Any significant devaluation of the Euro would have a serious impact on US economy. A weak Euro would give EU countries a trade advantage. US financial institution would be heavily hit as well given their sizable operations in EU countries. Obama and Bernanke were pushing Germany and France to intervene in Greece to prevent it's default on loans.

The US is only surviving on the loans from the bonds it can sell, US is already effectively bankrupt, if all the present bondholders asks for their money by cashing in their bonds, US do not have the money to honour those commitments.

So when big investors in 2009 where looking to limit their risk in the at the time very shaky looking USd, (China, Russia the Opec countries talking about changing from the USd as the oil trade currency ect.), and started to buy the at the time much more stable looking Euro bonds, that was a potential bomb under the US economy.

So according to many financial analysts the US started a campaign using huge hegde-funds and financial institutions and the financial press, to destabilise the Euro making it look less attractive to the bond investors.

And it worked, the investors went back to the US bonds, all talk about leaving the dollar, creating a new trade currency basket ect, disappeared and the Euro dived steeply in the first month's of 2010, much more than the slow and steadily falling USd.

So the figures says the Euro have fallen significantly, how that fits in with what you say I can't see, it is now at about 40 thb from Decembers 2009 49 thb, and the Euro has been as low as 38 thb just a few weeks ago, some is due to the thb going up 8% this year but the rest due to the hype about the Euros demise.

Merkel might not be entirely dissatisfied with that because as you say it has strengthened the Euro's competitiveness against the dollar on the export markets, Germany being the worlds biggest exporter in 2009, that could be one reason that more noise have not been made about the financial manoeuvres from the US protecting their trade currency status and bond market by effectively attacking the Euro.

It is a dirty business but a very big one.