The Great Euro Gamble

In today's Wall Street Journal we argue,

"When European Union leaders forged their monetary union without a full political and economic merger, they gambled on two vital factors: That economic forces could be kept in check, and that national democracies could be managed.

Over the past 16 months, we have been reminded time and again exactly how big and how irresponsible those gambles were. Sunday's was arguably the strongest reminder yet, courtesy of the anti-euro True Finns party that may hold the balance of power in the next Finnish government. Paris, Berlin and Brussels seem not to have factored Nordic populism into their grand plans for the euro. But ultimately the euro zone is about politics, and politics remain as local as they ever were."

We go on,

"The True Finns' success will not change European politics overnight, and the party may not even succeed in blocking Finland's participation in future bailouts. But, irrespective of what we think of the True Finns, the election does highlight how powerfully a euro-zone crisis can contribute to shaping national politics. Euro bailouts were also an important issue in Slovakia's elections last year, and helped to deliver a new governing coalition that refused to take part in Europe's Greek bailout. That government only reluctantly kicked in later to help create the temporary bailout fund that euro leaders are now looking to replace after 2013.

This year the True Finns asked voters to consider the same question that Slovaks did last year: Why should they work harder and retire later to pay for the mistakes and wasteful habits of southern European governments? This "triple-A populism" has proven a powerful force in a number of countries with sparkling credit ratings, including Germany. Writ large, this weekend's Finnish elections are a rebuke of one of the euro zone's central, and fatal, conceits: that political ambition can trump economic and democratic realities."

Looking at EU leaders' gamble on being able to keep economic forces in check, we note,

"Markets have now finally woken up to the fact that Greece and Germany are poles apart; it is time for EU leaders to do so as well. Ireland, Greece and Portugal have made all too clear that economic forces can rarely be predicted, let alone contained.

Some particularly federal-minded EU leaders took this as a pretext to push even harder for a full-fledged fiscal union. Former European Commission President Romano Prodi wrote in an op-ed in the Financial Times last May that "When the euro was born everyone knew that sooner or later a crisis would occur. . . . I was warning years ago that, through no one's fault in particular, extraordinary events could occur that would force joint co-ordination of fiscal policies."

That sentiment spurred EU leaders to take their next major gamble, which was even riskier than the first: They bet that once they did start to effect robust economic and political union, national voters and parliaments would play along and vote the "right" way. So last year, when the EU elites decided to break their own treaties and turn the euro zone into a de facto debt union, they forced taxpayers in some countries to take on the liabilities of foreign governments in other countries—without the possibility of voting these governments out of office. But taxpayers are now showing signs of revolt. "

We conclude,

"Will EU politicians' second gamble turn out as ill-judged as their first? Time will tell. But one thing is clear. The political price that European leaders are paying to keep their flawed project afloat continues to rise."

Will this make countries keener on joining the euro?

Negotiations on the shape and form of the eurozone's permanent bailout scheme - the "European Stability Mechanism (ESM)" - are entering a crucial phase. The fund is meant to be up and running by mid-2013 and is likely to have €500bn available. Of this amount, between €80bn and €100bn will be up-front cash from member states - the rest will come in the form of guarantees.

People are naturally getting nervous about this arrangement, particularly in Germany. Sueddeutsche suggested the other day that German taxpayers will need to contribute between €18bn to €25bn to the scheme in paid up cash (in addition to the guarantees).

Chancellor Angela Merkel isn't too keen on discussing how much Germany might have to contribute in the end. "She doesn't want to talk about this now", a diplomat reportedly said.

We can see why. A direct €25bn liability on Germany's books could increase the country's borrowing costs and hamper efforts to consolidate its budget.

To avoid this, the German government is pushing only for countries without a triple A rating to contribute paid-up cash, as triple A countries - so says Merkel - are lending their good name to the cause, and that's quite enough. But this, in turn, would increase the cash contributions from weaker eurozone members. This has raised alarm bells amongst weaker euro economies as well as a range of non-eurozone members.

Reuters yesterday quoted EU sources saying that eurozone members Estonia and Slovakia as well as Latvia, Lithuania, Bulgaria and the Czech Republic have all criticised the plans. They argue that basing cash contributions to the ESM on a country's proportion of the ECB's paid-up capital is unfair. The countries have even threatened to block proposals for tougher EU-wide budget rules unless changes are made to the suggested ESM arrangement. One representative said,

"Unless there is a change to the ESM capital key we will block the agreement on the governance package once it returns from parliament and EU finance ministers have to approve it by unanimity."

Also non-euro member Sweden has objected to the proposed capital key for the ESM.

Why do these countries feel so strongly about this issue. They're not in the eurozone after all? Well, probably because they understand that, were they one day to join, they could be forced to cough up actual cash to save a Greece, Ireland or Portugal. Paid up cash is a far more serious liability than loan guarantees. Slovakia's refusal to take part in the Greek bail-out gives a hint as to why these countries aren't thrilled by the prospect of a permanent bail-out arrangement linked to the ECB's capital key and credit status. In such an arrangement, smaller economies that haven't really done anything wrong could end up with a pretty hefty bill.

On a related note, where is the UK in all of this? So far, the UK appears to have taken little interest in the structure and pay-in arrangement of the permanent bail-out mechanism. If this is because it doesn't intend to ever join the euro, that's one thing.

But if it's because Britain thinks it has no stake in making sure that the new eurozone rules are fair and make economic sense - rather than facilitating even greater meltdowns down the road (a very real risk) - then the UK government is sadly mistaken.

"Slovakia needs a plan B: going back to the Koruna"

The Open Europe team must confess to have developed a certain fascination with Slovakia of late - a small country which hides a core of tenacity and strength, not least when bullied by outsiders.

You certainly can't accuse the political class in the country of being conformist. Slovakia joined the euro in 2009. Less than two years on, doubts are apperantly mounting over that decision. In an op-ed for Slovakian economic daily Hospodarske Noviny, Speaker of the Slovakian Parliament Richard Sulik (see picture) writes:

"We need to stop trusting eurozone leaders blindly and draw up a plan B: going back to the Slovakian Koruna."

Sulik argues that Slovakia made great efforts to join the euro because it was promised "a stable currency and solid rules". However, he notes, "two years later, it is sad to see that the rules are not the same for everyone, not to say that they do not exist at all."

Sad but true and credit to Sulik for speaking truth to power.

Slovakia was the only eurozone country which refused to contribute to the Greek bailout a couple of months ago, following a vote in its Parliament. On that occasion, the newly elected Prime Minister Iveta Radičová said:

Yes, we were the only ones who said 'no' loudly. But I'm sure that 'no' was in the heads of all representatives of the EU countries [...] What should I tell our citizens, that we should help those who aren't willing to help themselves?

Hard to argue with that, eh?

'We've only held up a mirror'

The Slovakian Parliament has overturned the decision by the country's previous government to help fund the €110bn eurozone bailout of Greece. Slovak MPs voted by 69 to two to refuse to take part. Slovak Finance Minister Ivan Miklos trashed the logic behind the bailout, telling the Slovak Parliament:

I do not consider it solidarity if it is solidarity between the poor and the rich, of the responsible with the irresponsible, or of taxpayers with bank owners and managers.

The European Commission, being the non-political organisation that never meddles in national politics that it is, rushed to condemn the move. EU Economic Affairs Commissioner Olli Rehn yesterday said,

I can only regret this breach of solidarity within the euro area and I expect the eurogroup and the [economic and finance ministers'] Council to return to the matter in their next meeting.

And in what can only be considered a thinly veiled threat, Mr. Rehn's spokesman added that Slovakia will not face any legal penalty for its Greek u-turn but should expect unspecified "political consequences."

But Mr. Miklos had a thing or two to say himself,

It's true the top politicians in the eurozone are not excited by our position and that we have irritated them quite a lot. But this is only because they have been creating alibis for themselves and we have held up their behaviour to a mirror.

Bulls-eye!

NB: At the same time, Slovak MPs did back the country's participation in the eurozone's overarching €750 billion bailout fund, the European Financial Stability Facility (EFSF), which puts Slovak taxpayers on the hook for €4.4 billion.

Sticking to your guns

The new Slovakian government is not bowing to pressure over its refusal to sign off on the eurozone bailout package. After a meeting with European Union Council President Herman van Rompuy tonight, Slovakian Prime Minister Iveta Radicova said, when asked about her view of the Slovakian contribution to the EU's €440 billion eurozone aid mechanism (still to be finalised) and the €110 billion bailout of Greece:

"The position of our minister of finance and also my personal and our political party [position] is as it was before, that we really do not agree, we really do not agree."

Crucially, according to Reuters, Radicova said her Cabinet would only meet to discuss the issue on Wednesday, meaning Slovakia would not be in a position to sign off on the €440 billion aid package when EU finance ministers meet to discuss it tomorrow.

To say that the Slovak Finance Minister, Ivan Miklos, will come under pressure at tomorrow's EU meeting is most definitely an understatement.