True Finns continue to rise

Last week, the True Finns announced that it could not participate in a Coalition government that supported the bail-out of Portugal, its opposition to which was a key plank of the party's election manifesto. Announcing the decision, True Finns leader Timo Soini said, "It would have been nice to be part of the government but you cannot betray yourself."

Soini may have passed up on power, but his decision seems to have gone down well with voters. In an opinion poll carried out at the end of last week - when it had already become clear that the True Finns would not join the government due to the Portugal bail-out - the party got 22.4%, beating its election score by over 2% and making it the biggest party for the first time. It is trailed by the National Coalition Party on 20.6%, the Social Democrats on 18.6% and the Centre Party on 14.4%.

At this rate - particularly if the eurozone continues to deteriorate, requiring more bail-outs - Soini could become absolutely lethal in four years' time. It's that tension again, inherent in the eurozone structure - political ambition vs national democracy vs. economics...

On a separate note - irrespective of what we think of the True Finns - there's an interesting contrast here to a certain UK party, which, upon joining a Coalition government as a junior partner dropped from 23% at the election to 18% just over a month later and falling even lower this year.

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."

The EU's walls of Jericho moment?

The exact consequences for the eurozone of the True Finns' success in yesterday's Finnish elections remain unclear. The result makes it the third largest party, securing 39 seats in the 200-strong parliament with 19% of the votes, close behind the National Coalition Party (NCP), which received 20.5% of the votes (44 seats in Parliament) and the Social Democrats which won 19.1% of the votes (42 seats). To put this into context, they polled only 4% in the last national elections.

With performance better than the 15 or so percent expected on Friday, a seat within the new coalition government is now a distinct possibility. Finnish television Yle quotes the party secretary of the victorious National Coalition Party saying that a government consisting of the three major parties is a "strong possibility", with the NCP’s Jyrki Katainen as Prime Minister.

Formal coalition negotiations are due to start on 27 April, which could make it very difficult for Finland to sign up to a bail-out package for Portugal, as that requires the approval of Finnish Parliament. True Finns leader Timo Soini has re-stated his opposition to the Portuguese bail-out package following last night’s election results. “I don’t believe that the package that is there will remain”, he told Yle last night. The Social Democrats want Portugal to restructure its debt rather than seek a bail-out, which is an additional factor in all of this. However, let's not also forget as with all politicians, Mr. Soini wants to be in government - he wants powers - so it's possible that he might compromise on the party's tough 'no more bailouts' position. What's clear is that when it comes to the EU Soini and Katainen occupy two different planets.

Regardless, it's clear that a new brand of "triple A" populism has emerged in the creditor eurozone countries, whose voters are voicing strong opposition to the "we'll keep the euro together at any price" doctrine that they have been fed by EU elites up to now. As we've noted before, such anti-euro sentiments are now picked up by nationalist parties from Vienna to Paris, feeding into the mix of anti-incumbency, pro-independence and most often, strong anti-immigration sentiments.

As we also noted before, the "far-right" label is inappropriate as a generalised term to describe the various parties currently occupying this space around Europe - they're all different in their make-up, roots and emphasis with some a lot nastier than others - and the True Finns simply isn't a "far right" party. What's clear though, is that they all push a heavily nationalist agenda, and they all fish in more or less murky, anti-immigration waters.

But in relation to the eurozone specifically, what's so significant about this election is that it's changing the parameters of the debate. In Austria, Netherlands, Germany and France, the established parties have managed to keep strong anti-euro, anti-bail-out forces outside the realm of government. The Dutch government rely on the opposition parties to circumvent Gert Wilders' Freedom Party, for example. If the True Finns make it into government - and chances are that they will - 'triple A populism' will have become part of the mainstream conversation, in a mainstream European country.

The guiding principle of European integration has always been 'build the institutions and the facts of life will follow'. In the realms of eurozone bail-outs, as well as in the contentious domain of immigration, this guiding principle is now being tested to its limits.

As Gideon Rachman points out on his blog today, the EU is in "deep trouble". Someone (a certain Mr T. Blair), in a speech to the European Parliament, said in 2005:

"It is time to give ourselves a reality check. To receive the wake-up call. The people are blowing the trumpets round the city walls. Are we listening? Have we the political will to go out and meet them so that they regard our leadership as part of the solution not the problem?"

That was six years ago. It's a most unfortunate irony that EU leaders, in their misguided efforts to stamp out 'nationalism' via over-building institutions and attempting to superimpose an artificial identity from above, are now contributing to the rise of the very currents they were professing to fight.

First to the Finnish line

This is a graph showing the support for the different parties, according to a poll published last night, ahead of the Finnish national elections on Sunday. All international eyes are on the True Finns (fourth from the left) - the party that has said it opposes a bail-out deal for Portugal and putting any more cash on the table for struggling eurozone economies. In fact, the party doesn't want to be in the euro at all.

A lot has been said about the True Finns, with the European media all of a sudden forced to become experts on Finnish national politics - it has to be said with varying degrees of success. That many still refer to the True Finns as a "right wing" party indicates the need for a bit more analysis and a bit less reliance on labels that are flying around. The party is pretty skilfully moving along the right-left scale. It's effectively social democratic on economic and welfare issues, favouring a big state, combined with a pretty clear socially conservative flavour. It's definitely populist and not exactly enthusiastic about immigration (and this in a country which accepts some of the fewest migrants in Europe).

So what will happen on Sunday? We wouldn't bet our money on any player. The True Finns have seen a drop in support recently - 15.4% in the poll published yesterday, down from 17.2% a month ago. The National Coalition Party extended its lead to 21.2% in yesterday's poll, while the Centre Party was the second largest party at 18.6%. The Social Democrats were at 18%. The Nordic bookies don't think the True Finns will make it into government and will give you 2.10 times your money for a bet on them winning ministerial seats, while a bet on them not making it only gives you 1.65 times your money.

Regardless, the True Finns are likely to make huge gains compared to the last elections in which they scored just over 4% (see the rise of the True Finns here, in yellow). And a second thing to remember, the Social Democrats - currently at 18% - have also expressed pretty clear opposition to a Portuguese bail-out, instead arguing for a restructuring. Between them, the two parties could well reach above 30% - that's a pretty powerful anti-bail-out bloc. As we've noted before, this could potentially hugely complicate a Portuguese bail-out, as well as efforts to top up the temporary bail-out fund (EFSM) and cash injections in to the permanent rescue mechanism (EFM).

The elections in Finland have made people - not least many opinion formers - start to realise that, shock horror, ultimately the eurozone is about politics. And as we know all politics is local.

In fact, it's difficult to find a more conspicuous example of the inherent flaws of the eurozone - the idea that political ambition can stamp out both economic and democratic realities - coming up against the full force of national democracy.

The political lesson from the Portuguese bail-out: don’t give up EU vetoes

Over on Conservative Home we argue that the main political lesson for the UK government from the Portuguese bail-out is don’t give up EU vetoes without thinking through all possible consquences. We argue:

"And here’s the thing, the reason why the UK is now required to underwrite a Portuguese bail-out to the tune of £3-4 bn (partly via the EU budget, the legality of which is dubious, party via the IMF, which is fair game) isn’t Alistair Darling, who signed the emergency bail-out deal in May last year, or George Osborne, who allegedly was consulted by Darling. The UK long ago gave up its veto over the part of the EU treaties – the now infamous article 122 – that can be used to commit Britain to financially assisting an EU country in trouble, if that country is hit by a “natural disaster” or “occurrences beyond its control.” Even if Darling, or Osborne for that matter, had objected to the emergency EU bail-out fund last May, they would probably have been outvoted as the decision was subject to majority voting (whether a UK Chancellor, even if he had had a veto, would have wanted to block the deal, given the enormous financial and political pressures at work is also open to debate).

The question then is, whose brilliant idea was it to give up the veto over article 122 – which has effectively become the financial equivalent to Nato’s Article 5 on mutual military assistance?"

To get the answer, read the full post.

When those who claim to know get it wrong

Last June, we published a pamphlet titled "They Said It: how the EU elite got it wrong on the euro", in which we compared what politicians, central bankers, journalists and opinion makers said about the Single Currency before the eurozone crisis erupted - to what they say now. It's a pretty shocking read, and should make people think twice before making the argument against EU-related referenda on the grounds that 'average people are too stupid to understand such complex issues'. On the euro, by far the most important issue relating to the European project, it was the elite (in politics, in media and elsewhere) who got it spectacularly wrong - for whatever reason: political vanity, ideology, short-term thinking, ignorance or plain incompetence.

Take the FT's Wolfgang Munchau, for example. For years, the guy churned out columns praising the euro, sometimes with caveats, but nothing like the stuff we're seeing now.

Back in 2006, Munchau argued:

"There is not the slightest danger of a break-up of the Eurozone. On the contrary, I expect the Eurozone to be exceptionally stable in the long run. Make no mistake, the Eurozone is here to stay".

And in 2008,

"The world's two large reserve currencies, the dollar and the euro, offer more protection from speculative attack than a free-floating offshore currency unit. The UK will at some point have to make a choice whether it wants to be in the Eurozone or whether it wants to seek an alternative use for those rather tall buildings in the heart of London".

We're not saying that he's not making many valid and interesting points in his columns. But seriously, these are painfully inaccurate predictions. And compare to what he's been saying over the last few months:

“The probability of scenario four [eurozone break-up] cannot be zero or even close to zero. When the eurozone crisis broke out, the probability of failure was considered as small, but non-trivially positive. It is higher now despite the ‘whatever it takes’ pledge…My point is that if Germany is serious about limited liability – and I believe it is – the probability of a break-up is anything but tiny.”

Trust us, we can make the list of contradictory quotes from Munchau very very long. In fact, we could write a new "They said it" every single month, and wouldn't have any difficulty filling it with material, as established figures continue to contradict themselves on the euro.

Take this from the BBC's economics editor Robert Peston - who clearly is a clever and nice chap - but on potential UK liabilities in a Portugal bail-out he was just plain wrong, as we noted at the time. Two weeks ago - when it was becoming obvious that Portugal would had to seek a bail-out -he noted on his blog and on the Today Programme (and contrary to what we said):

“Only in the event that the Portuguese financial crisis exhausted the available money in the eurozone's bail out fund - which it won't - would the UK become liable.”

Last week, when the Treasury had confirmed that the UK will be partly liable, Peston did a U-turn:

“First of all, it does now look as though the implied UK contribution to the Portuguese bailout will be around 4.8bn euros or £4.2bn (in line with what I've been saying).”

Excuse us?

Okay, so the eurozone crisis is a moving target and we all get stuff wrong from time to time, but this is pretty bad. It's also interesting that those complaining about the poor coverage of EU issues in UK media never quite seem to look at the flip side of the coin.

A dog eat dog world

This placard seems to capture how a lot of Portuguese are today feeling about their economic future - Socrates is the poodle in Merkel's arms. (hat-tip FTD)

Another one bites the dust…

Portugal’s announcement that it too will tap the EU/IMF bail-out fund comes as no surprise. As we’ve argued many times before, it was merely a question of time. The announcement has however send eurozone hawks into a tailspin as questions over the amount, timing and conditions remain to be answered. Here’s some leaks picked up from the Portuguese press and elsewhere.

The size of the bail-out is expected to fall between €70bn to €90bn. Jornal de Negócios today reports that Jean-Claude Juncker says €75bn could be “appropriate”. Similar figures have been flying around for some time though. The Portuguese papers are somewhat less conservative, with many papers citing Diário Económico's estimate that the figure could rise to €90bn.

Público report that Guy Schuller, a Spokesperson for Jean-Claude Juncker says that technically there is no reason why some of the bail-out cannot arrive before the elections. This is also backed up by a European source close to tomorrow’s ECOFIN meeting who is cited in Dow Jones saying, “It will be difficult to concede a total package to a caretaker government” but “part of the resources could arrive before the elections”. “The preliminary technical work for the case of Portugal has already been done”, making it possible to issue the resources with “great speed”, claims the source.

The bail-out news has received a mixed response within Portugal, President Anibal Cavaco welcomed the move, announcing his support for caretaker PM José Sócrates and calling for “an attitude of responsible cooperation from the opposition parties”.

Opposition leader Pedro Passos said he supports the move, claiming it’s a way “to guarantee the national security and to preserve the reputation of Portugal abroad”. However, Reuters quotes a senior EU official who said that “the conditions demanded by Brussels are going to be very similar to the measures of the PEC, rejected in March by Parliament”. The same conditions which Passos so vehemently opposed just two weeks ago.

A Portuguese government source confirmed today that a bail-out will only be arranged with the support of the opposition. The National Federation of Trade Unions for the public sector will hold a strike on 6 May under the guise of getting “the IMF out of Portugal”, reports Diário Económico.

Meanwhile, the President of the Portuguese Banking Association has said that the ECB gave “clear instructions” to the banks to reduce their exposure to the government and other public sector bodies.

Some straight talking from Borg

Anders Borg, the Finance Minister of non-euro member Sweden, today had some strong things to say about how the Portuguese government has handled itself. He told Swedish Radio:

"We have reason to be very critical of the Portuguese government. This is a decision that should have been made in November, December. It’s been obvious for a long time that this country can’t stand on its own two feet.

There have been very frank discussions but the discussions have got stuck in internal political discussions instead of the necessary decisions are being made.

The Portuguese government has made the situation worse for itself and has contributed to an uncertain situation which has cost jobs and wealth in other countries. So we have reason to be strongly critical of them."

On the question on whether Sweden will contribute to a bail-out,

“It’s so complicated so we need to wait until some pieces fall into place.”

Pretty tough talk.

Portugal: so what are the options?

Despite Portugal asking for a bailout there is still massive uncertainty over what form a bailout would take and how large it would need to be. Below we have broken down the potential size of the bailouts and what funding needs they could cover in Portugal. We have also looked at what amount the UK would be liable for in each (as outlined in our briefing on the Portugal bail-out published the other week):

Total cost of a Portuguese bail-out: €60bn
Debt maturing this year = €12.3bn (Short and Long term from June onwards)
Debt maturing in 2012 and 2013 = €17.25bn (Long term only)
Deficit for the next three years = €28.3bn (2011 - 2013)
(This leaves €2.15bn leftover, which could be used to aid the banking sector, or simply to allow some room for manoeuvre within the bail-out)

This is likely the lowest viable level for a bail-out package since it only just manages to cover Portugal up to the end of 2013. Any lower and the money would not be sufficient to cover Portugal’s costs for a reasonable amount of time.

Total cost of a Portuguese bail-out: €70bn
Debt maturing this year = €16.8bn (Short and Long term from April onwards)
Debt maturing in the next three years = €23.8bn (Long term only)
Deficit for the next three years = €24.74bn (Apr 2011 – mid 2014)
Banking sector aid = €5bn

At this level Portugal could be taken off the markets from now until mid 2014, we expect a full bailout of Portugal to be of this magnitude (possibly up to €75bn)

Total amount of a Portuguese bail-out: €80bn
Debt maturing this year = €16.8bn (Short and Long term from April onwards)
Debt maturing up to the end of 2014= €30.4bn (Long term only)
Deficit for the next three years = €27.1bn (Apr 2011 – end 2014)
Banking Sector Aid = €5.7bn

An €80bn bail-out package could take Portugal off the market until the end of 2014. This includes covering the debt as well as the deficit from now until the end of 2014. There would also be scope to provide the banking sector with €5.7bn to aid recapitalisation or to encourage lending to households and SMEs. This will be a harder sell to some of the Triple A rated countries, especially if they believe Portugal could make do with less.

Total amount of a Portuguese bail-out: €90bn
Debt maturing this year = €16.8bn (Short and Long term from April onwards)
Debt maturing up to the end of 2014= €30.4bn (Long term only)
Deficit for the next three years = €27.1bn (Apr 2011 – end 2014)
Banking Sector Aid = €15.7bn

The extra funding here could be put towards covering or reducing some of the short term debt which may still be required for unforeseen funding costs over the three years. This amount could be floated as a way to make sure there are no renegotiations or shortage of funding as seen in Greece and Ireland.

Obviously, the amount that the UK would be liable for increases with the level of the bail-outs, however, there is still a very large range given the various structures which the bail-out could take:


It is important to note that any bail-out would not impose direct costs onto the UK, other than the cash contributions which the UK makes to the IMF. However, a bailout is still significant for UK taxpayers, as it effectively requires them to underwrite the debt of peripheral eurozone economies. The liabilities also significantly increase the level of UK exposure to these economies. In any case, if a firm took on large liabilities they would need to be declared in its accounting procedures and would be taken account of by anyone who assessed the financial state of the company. The same should definitely be true of governments.

There has also been talk of bridge loans, see our previous post for a discussion of that issue.

What's the truth about the True Finns?

We have received a couple of comments in regards to our blog post below on the rise of populist parties in the wake of the eurozone bail-outs. Some have been unhappy about our assertion that the Front National is gaining ground in French politics, whereas others have taken issue with us mentioning the True Finns in the same breath as the Front National and FPÖ (the expression "not as bad as FPÖ" has caused particular offence).

But on the point about the True Finns, a clarification might be appropriate. The True Finns party, or Perussuomalaiset in Finnish, has its roots in an anti-incumbency, rural protest movement from the 1950s, leading to the formation of a political party, eventually named the Finnish Rural Party. The party's dissolution in 1995 led to the creation of the True Finns (one of the party's slogans, "Crush the power hold of the old parties", is testament to its heritage). More than anything else, its euroscepticism seems to flow out of this tradition (which also explains its opposition to providing more cash to the temporary eurozone bail-out fund, the EFSF, for more bail-outs - bail-outs which we agree aren't really working).

So clearly, the party has very different roots compared to other Scandinavian populist parties, such as the Sweden Democrats and the Danish People's Party (for Swedish speakers, here's an article breaking it down). The Front National, Geert Wilder's Freedom Party etc are much farther away again from the True Finns.

In other words, the party cannot be described as "far right", as some non-Finnish media insist on so doing. However, it cannot be described as "centre-right" either, as it draws heavily from an old school, social democratic agenda (i.e. high taxes and a big welfare state). Kind of like a social democratic tea party, with a lot of emphasis on national sovereignty and independence.

According to an opinion poll published today, the party has lost some ground over the last few days, and are now fourth in the race (compared to second in a poll published the other week) - a race that is still wide open it has to be said.

What makes this interesting for the EU and the eurozone is that Finland is the first Triple A eurozone country in which euro bail-outs have become a national election issue. As the leader of the True Finns, Timo Soini, put it, the election might evolve into the referendum which the Finnish people were refused when the euro was first introduced.

We shall see.

A populist warning light?

A new opinion poll shows that Austrian, anti-immigrant, populist party FPÖ would end up on top if elections were held today, beating both the social democratic SPÖ and conservative ÖVP. There are of course multiple reasons for the party's rise, but we note that FPÖ leader Heinz-Christian Strachewhich last week slammed Austria's participation in, and the cost of, eurozone bail-outs. "Thank you, [Austrian Chancellor] Werner Faymannm," he said sarcastically.

In Finland, the "True Finns" party, under the leadership of Timo Soini (pictured), has seemingly come from nowhere and transformed itself into a full-scale political force. A recent opinion poll put it second, ahead of this month's national elections. Though not nearly as bad as FPÖ, it does run on a highly populist platform with a strong anti-euro flavour. The party was almost single-handedly responsible for derailing the EU deal on how to increase the size of the eurozone's bailout fund, the EFSF. The decision is now postponed until June, after the Finnish elections. And as Jan Sundberg, Professor at University of Helisnki puts it, "Portugal crashing would be a gift to the True Finns".

In the Netherlands, the government does not have a majority in Parliament, but has to rely on Geert Wilders' Party for Freedom, which is the third largest party in the country. Wilders has also spoken out against the euro-bailouts. So far, the Dutch government has relied on the other Dutch opposition parties to get its EU measures though parliament.

In France, far-right Front National leader Marine Le Pen is gaining popularity, and one poll even showed her ahead of all other candidates ahead of next year's Presidential elections. Le Pen has called for France to leave the eurozone, along with Spain, Greece and Portugal, saying:

"They promised us that this currency would bring growth and welfare, and what happened? People were destroyed, we are talking about a real tragedy. Look at what happened to Greece."

Again, there are numerous factors at work here - and we should be careful to over-simplify or generalise - but it's hard not to detect a worrying trend: four of the eurozone's main creditor countries (and incidentally net contributors to the EU budget), which are underwriting struggling euro governments' debt to the tune of hundreds of billions, are experiencing a dramatic surge in support for populist parties. These parties would not only reject the bail-outs and the Single Currency but also, in all likelihood, the EU itself.

So what about the big kid on the block: Germany?

Germany doesn't really have its own version of the populist parties we see in other parts of Europe - on the left, Die Linke might fit part of the bill, but it's still not quite the same. Therefore, there's no real political platform for the kind of aggressive anti-euro sentiments that we see in Austria for example (which also plays on anti-immigration and anti-incumbency) - and there's unlikely to be one in the immediate future.

It's clear, however, that German public opinion is growing increasingly wary of the direction of the euro. Slowly, these sentiments are beginning to trickle through to party politics. The motion which was passed by a near-unanimous German Parliament asking Merkel to backtrack on an agreement between eurozone leaders, is one example (though it shouldn't be overstated either). But there clearly is a vacuum in EU politics in terms of voicing alternative visions for the direction of the Single Currency and the EU - and a mismatch between public opinion and the political class.

Writing in FTD last week, Wolfgang Münchau - who, until recently, was the arch-optimist amongst eurozone commentators - argued that "a right-wing spot is free" in Germany. He suggested that the liberal FDP will fill the vacuum and turn into a 'eurosceptic' party. Perhaps. If so, the hope is that the FDP could transform itself into a sensible, EU reformist party, pushing for the revolutionary idea (yes, sarcasm) that the single currency and the EU should be based on sound economics and democracy. Such an outcome would benefit both Germany and Europe.

The fear, as ever, is that the vacuum will be filled by other, nastier political forces.

A Europe in which populist, anti-immigrant parties hold strong positions in creditor (or triple A countries), while far-left parties gain prominence in debtor nations such as Greece or Portugal, would really be the worst of all worlds.

But if Europe's mainstream politicians continue to stick their heads in the sand, and refuse to speak about the problems facing the eurozone - they should not be surprised if voters turn to the parties that do engage in some straight talking, however flawed or nasty such talk may be.

Mainstream political parties and their leaders got it spectacularly wrong on the euro in the past. Perhaps it's time to think about some more fundamental solutions to the eurozone's problems?

How much longer can the eurozone live an alternate reality?

This week's fun and games are over, with EU leaders concluding their Brussels summit earlier this afternoon.

Once again, this summit is unlikely to be remembered for anything EU leaders could agree on but, rather, for what eurozone leaders, in particular, were unwilling to even discuss. Namely, getting to the root of sorting out the eurozone's short-to-medium-term future.

As the BBC's Paul Mason asks on his blog:

Why, within the space of 12 days, do we get a "grand bargain" to create a Euro Stability Mechanism (11 March), which is then (a) knocked back by Finland (b) defied by Portugal (c) renegotiated at the behest of Germany's FDP coalition partner so they can do a tax giveaway in the coming elections; and (d) excludes Ireland anyway?

Chancellor Angela Merkel's, and by extension Germany's, focus on what are, in the grand scheme of things, minor details is starting to betray a worrying resemblance to an obsessive-compulsive's inability to recognise the bigger and far more important realities in life. Merkel's two 'victories' from this summit appear to be the fact that Germany will now pay in its share of capital to the permanent post-2013 eurozone bailout fund over five years rather than four and an EU commitment to "stress test" nuclear power stations. These are both pretty obvious bones thrown to the domestic German audience - the SPD and Greens are breathing down the neck of Merkel's CDU party in important regional elections - but will do little to reassure people that the eurozone is serious about tackling its problems. Not for the first time, domestic politics is pitted against eurozone imperatives.

True, the proposals on economic governance and tighter fiscal discipline were broadly endorsed, but earlier German proposals have been watered down and there's still much to play for in regards to how much of the package will be credibly enforceable. How will Italy and Greece cope with demands to get their debt-to-GDP below the 60% threshold?

Partly also due to Finnish resistance, eurozone leaders were unable to reach agreement on how to top up the existing temporary bailout fund, which, with Portugal more or less in a state of political and economic crisis seems a little complacent to say the least. We're told that all will be settled at the next summit in June - but haven't we heard this before; "It will all be sorted next time, no need to worry".

Maybe Merkel and the rest of the eurozone's leaders just prefer working under pressure. June really will be cutting it fine: Portuguese elections are expected to have been held only a week or so before and the new attempt at credible stress tests for Europe's banks are due to be published.

How much longer can the eurozone live an alternate reality?

Kicking the euro while it’s down

Eurozone leaders seem intent on making their crisis resolution as messy as possible. According to draft summit conclusions, seen by Reuters, the decision on how the EFSF will increase its lending effective lending capacity to €440bn will be delayed until June.

Clearly the months of pitching this week’s EU summit as the defining moment in solving the eurozone crisis were not well thought through or just wishful thinking. The markets' reaction to what is now destined to be a seriously underwhelming agreement is likely to be painful for the peripheral eurozone economies.

Discussions will now focus on the ESM, which is not due to come into force until 2013. Crisis management 101 (for the EU officials out there) – handle the problems on your plate first, then deal with the ones coming down the line. Not that an agreement has been finalised on the ESM either, with German Chancellor Angela Merkel looking to score a more gradual timeline for Germany’s contributions to the fund, probably given the increasing pressures her party is facing in this year's local elections.

Not one to be topped, Portuguese Prime Minister, Jose Socrates walked out of Parliament in the middle of possibly the most important vote in the country's recent history. According to Portuguese press reports, he left without saying a word and no-one knows if or when he will be coming back.

Well, at least its shaping up to be an eventful summit…

Socrates needs to get philosophical

Looks like Portugal could be asking for a bailout by the end of the week.

Pedro Passos Coelho, Leader of the main opposition party, said on Saturday:

“We need external aid. The Prime Minister does not want to admit that, but the whole country has already understood it.”

He also said he will continue to oppose the new austerity measures, which are due to be voted on by the Parliament tomorrow or Wednesday.

Portuguese Prime Minister, Jose Socrates, announced that:

“Should the Parliament vote against, then the government would no longer have the means to act.”

With massive public protests against austerity in Portugal over the weekend, there seems less and less political incentive for the opposition to cave in and support the new measures. The only thing that everyone seems to agree on is that if the new austerity measures are voted down, Portugal will be forced to ask for a bailout.

However, given Socrates stance the government may fall if he fails to garner the support he needs.

That does not bode well given the EU summit at the end of the week. Socrates needs to get his thinking cap on…as going into summit negotiations without a government cannot be a good strategy.

German Parliament flexes its muscles

As we've highlighted before, a bust-up in Germany over the fate of the eurozone's bail-out schemes could be imminent, both on the EFSF and its permanent successor.

As if Merkel didn't have enough on her hands, the Bundestag yesterday approved a motion that explicitly demands that the German government bans the EFSF from buying government bonds from troubled eurozone countries. In effect, the Bundestag is asking Merkel to backtrack on last weekend's agreement between eurozone leaders which would have given the EFSF the mandate to buy bonds directly. That's a pretty big set-back for the Chancellor.

The motion isn't binding for the government, but still hugely problematic since the Bundestag needs to approve any deal to increase the scope and size of the EFSF.

The vote illustrates the growing gaps between Angela Merkel and parliamentarians belonging to all three coalition parties (CDU, CSU and the FDP). If this happend in the UK it would be labelled an outright "rebellion" against the government.

According to Märkische Allgemeine, the Bundestag gave its consent to a permanent eurozone bail-out fund, a European Stability Mechanism (ESM), which would take over from the EFSF in 2013. However, it attached a number of strings, including:

- strengthened stability and growth pact
- guarantees for the independence of the ECB
- safeguards that the ESM would only be activated in emergency cases
- a mechanism which would involve private creditors in the rescue fund (unclear how this would work)
- a restructuring procedure which would include private creditors
- a guarantee that the eurozone would not turn into a transfer union.

If you think about it, those are not small thing to ask for in the current climate. This one could be interesting.

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.

The euro pact and Germany: Triumph or a coming bust-up?

The Telegraph's Ambrose Evans-Pritchard describes the weekend deal at the EU summit as a "total German triumph". He paraphrases Chancellor Angela Merkel saying that "whoever wants credit must fulfil our conditions".

Regular readers of this blog will know that we rate Ambrose very highly (at a time when most other journalists, including the FT gang, couldn't spot a currency-related credit crisis from a yard's distance, he warned against what we've seen in the eurozone over the last year).

On this one, however, we think that his assessment might be a bit premature.

Perceptions matter tremendously in markets as well as in politics. And the perception in Germany is certainly not one of triumph.

Die Welt quotes a top EU diplomat describing Merkel's "pact for the euro" as an "empty shell", predicting that "in the coming weeks the spreads of troubled countries could further increase". An analysis in the newspaper notes that the pact "remains far beneath the original expectations of the German government", given the large room for manoeuvre that member states are given in its implementation. The headline in the paper reads: "Merkel's secret euro capitulation".

And Merkel might even face a fight within her own coalition about the terms and crucial details of the euro pact.

Although FDP leader and Foreign Minister Westerwelle called the deal an acceptable compromise, liberal MP Frank Schaeffler said that "the result contradicts the position of the FDP group in parliament”. Volker Wissing, finance spokesman of the liberal faction in the Bundestag stressed that an earlier agreement on this among majority parties in the Bundestag "had excluded what has now been decided at government level", as he expected "very difficult talks", which could endanger the German Parliament's approval of the deal.

"It is surely close to a transfer union," Michael Meister, deputy parliamentary leader of the Christian Democrat (CDU) party added (and it was not meant as a positive remark). CSU MP Thomas Silberhorn bluntly said that "the government has stepped over a red line that the parliamentary groups had clearly defined."

Just ahead of the summit, another top Christian Democrat politician, Bundestag Speaker Norbert Lammert, had voiced concern about the whole thing, lamenting that "many representatives still don't feel sufficiently informed".

It is not clear whether these (prominent) backbenchers will in the end vote down the agreement. Bloomberg claimed this afternoon that several backbenchers have signalled their willingness to vote for the deal when it reaches the Bundestag.

But the strong talk is a reminder of the nervousness about all of this in Germany, especially in the run-up to the key regional elections in two weeks time in Baden-Württemberg - a stronghold for Merkel's CDU where the party could now suffer defeat.

It doesn't help that outgoing Bundestag President Axel Weber has stepped up his criticism of current eurozone policies. In a hearing at a Bundestag committee this week, he will warn European governments against making any bond purchases as a means of bailing out weak Eurozone countries, saying

"the result would be that private creditors and national financial policymakers would be relieved even further of their responsibility, and taxpayers of the countries doing the financing would be burdened with further, possibly substantial risks."

Chances are that Merkel will manage to push through this deal in the short term - though the German Parliament may demand some red meat in return for giving its approval.

But, as the EU correspondent for the Frankfurter Allgemeine Zeitung, Werner Mussler, warns: “the consistent loyalty of Germans to Europe is facing a test.” And Europe's biggest tabloid Bild today carries the headline, "saving the euro gets increasingly expensive!".

Some members of the German establishment have already started questionning the very premise on which Merkel has based her bail-out concessions (saving the euro, even with the risk of more bail-outs and a move away from traditional Bundesbank policy is cheaper than refusing to pay). For example, the former boss of the German industry federation BDI, Hans-Olaf Henkel. Although a former euro enthusiast, he now argues in favour of splitting up the eurozone, writing that it has become “a transfer union, a community of redistribution in which a new competitive discipline will emerge: who can tap the others for the greatest amount."

Berlin's biggest fear is that Mr. Henkel is finding it increasingly easier to recruit more allies.

A third way to bail out struggling countries

Much was discussed and a little agreed during Friday’s eurozone summit, but it was enough to give the euro a bit of a boost. Investors - going into the weekend with exceptionally low expectations - seemed pleased with the news that anything was agreed at all.

The most important and controversial measure agreed over the weekend looks to be allowing the EFSF - the eurozone's main bail-out fund - to purchase government debt, under exceptional circumstances.

The conditions imposed on any country wishing to make use of the EFSF's bond-buying scheme are pretty exceptional as well:

- EFSF can only buy bonds on the primary market (i.e. directly from governments)
- For this to take place, the government must enact an austerity programme as it would under a bailout

So what exactly is the difference between a bailout and using the EFSF to buy government bonds under these conditions? Not much, as far as we can tell.

One argument behind restricting purchases to the primary market is that it bails out governments rather than investors. Although that might be true, if the EFSF did purchase bonds in the secondary market the cost of borrowing for peripheral governments would undoubtedly fall by a lot more. There is also the added advantage of purchasing existing debt rather than issuing new debt and increasing the already heavy burden. In the end it looks like the standard EU compromise where both sides meet somewhere in the middle to achieve very little.

The decision also means that the ECB could well be forced to continue buying bonds on the secondary market, since a struggling country will think twice before signing up to strict conditions in return for the EFSF relieving them of some of their junk bonds.

What is significant, however, is that there are now three avenues through which the cost of failing economies can be transferred onto EU taxpayers - about a year ago, there were none (remember the days when some of us were foolish enough to believe that a guarantee in the EU Treaties, i.e. the no bail-out clause, actually meant something?):

1) Direct loans from one of the bail-out funds (requiring unanimity or a majority vote amongst eurozone governments)
2) The ECB buying government bonds, from the secondary market (at the discretion of the ECB)
3) The EFSF buying government bonds, directly from governments (unclear how decisions will be reached on when this can happen).

Many of the key questions remain, however. Such as:

- What interest rate will the EFSF be charging on government bonds purchased?
- Will this option be open to countries who have already received a bailout?
- How will the activation of the EFSF's bond purchasing programme be decided?
- Will Merkel be able to see this through amid domestic political resistance?

We’d hazard a guess that the EFSF would charge below market rates but above its lending rate, but we’d also expect some differentiation from the bailout loans otherwise it would look completely pointless.

Apart from that, we note that Greece - as we expected - has been granted what can only be described as a debt restructuring, though a limited one.

So on the upside, markets are slightly more re-assured. On the downside, expectations are now raised that a meaningful deal will be struck at the summit in two week's time.

When you do scratch the surface, this looks perilously close to more of the same.

A Portuguese bail-out won't be enough

Over on Europe’s World we have a post on the future of Portugal. We argue that a bailout now looks inevitable but that it will do little to solve Portugal’s problems due to:

- Funding requirements topping €39.4bn this year alone, equal to 25% of GDP.
- Unsustainable borrowing costs both in the short term and the long term, as we have already noted.
- Over reliance on ECB funding - both the state and the banking sector
- Massive lack of competitiveness as well as few policy options to facilitate economic reforms and foster growth

Given the mountain of issues facing Portugal, a bailout might give the appearance of providing help in the short term, but restructuring debt and tackling the problem at its source - high debt to GDP ratio and massive amounts of private debt - will provide a much better long term solution for both the country and the eurozone. However, even so, in the absence of some serious reforms to boost the country's competitiveness, going far beyond those that we're seeing at the moment, Portugal may find itself in this position again before too long.

You can check out the full article here.