PARIS, March 14, 2010 (AFP) - The debt crisis in Greece is unleashing turmoil that analysts say could shake the eurozone to its foundations, even turning it from a castle of great expectations into a cooperative of great share-outs.
"The current crisis has reminded us that convergence is far from complete in Europe and has revived fears of ultimately divergent paths," analysts at Natixis bank wrote recently.
|A group of striking policemen hold a large banner as they march in Athens on March 11, 2010 during a demonstration marking the general strike. AFP photo|
However, Germany, which to the surprise of many has promoted the idea of a European monetary fund to rescue troubled eurozone economies, has increasingly made clear that any such body would have to have ferocious powers and would use them.
On a broader landscape, some analysts now debate the possibility of an internal split in the European Union, with financially stronger northern countries washing their hands of responsibility towards weaker countries in the south.
"There is a risk that Europe will evolve into a two-class project in which financially pressed Southern Europe, in particular is left to fend for itself," said scholar Ian Lesser in an analysis for the German Marshal Fund of the United States.
"Across Europe, states will be left largely responsible for, and exposed to the consequence of, their own economic policies."
He warned that a decoupled southern Europe "will spell trouble in political and security terms," leaving Europe less able to confront "pressing strategic challenges emanating from the Mediterranean," notably regarding energy and migration.
Argument over the motives behind the need for and effects of a rescue fund goes to the root of some founding principles of the eurozone.
One of these holds that EU countries are committed to national responsibility for keeping their budgets within the rules, albeit under supervision. Another is that such discipline is vital to ever greater economic convergence, considered essential for the long-term success of a single currency zone.
There is also a deeper European Union political aim of convergence towards increased common prosperity.
Now Greece is fighting to escape a threat of bankruptcy and there is concern that if the operation loses credibility, Spain and Portugal might be the next to be thrust into severe difficulties.
The sudden debate over the outline idea for a rescue fund is causing some confusion and raising a pivotal question: would it weaken or strengthen the credibility of the 16-nation eurozone, and therefore its long-term future?
Some analysts point to what is a known as a "moral hazard" issue, meaning the risk of encouraging imprudent spending by governments on the assumption that their eurozone partners would always be ready with a safety net.
Some even go as far as to say that such a fund would be an admission of failure, a recognition that the rules and supposed penalties in the Stability and Growth Pact, intended to pull all eurozone members towards the high ground of public surpluses, have been breached and diluted to the point of disgrace.
At Commerzbank, chief economist Joerg Kraemer, commenting on the controversy over a European monetary fund, said that the eurozone appeared to be "moving away from a monetary union ... and toward a transfer union," meaning a monetary zone dependent on support from strong countries for the weak, and a pooling of national creditworthiness.
"The European Monetary Fund would violate the cornerstone of the Maastricht Treaty (which created the eurozone), that is, the non bail-out clause," Kraemer said.
"You can't demand fiscal rules and at the same time benefit those who break these rules. This is a basic contradiction ... I think that in the beginning such a European Monetary Fund could work," he said.
"But in the long run, I think it weakens the incentives for countries such as Greece to solve their own problems," he said, arguing that "the watered down version of the Stability and Growth Pact" had "failed," not the original pact.
This was a reference to the initial German demand, before the euro was created, that breaches of the budget rules should incur clear-cut and huge fines. Most of the teeth were pulled at birth, largely because of objections by France, and the rules were further softened after the Internet and then the financial crises.
Kraemer said that "we have to add new elements" such as "automatic fines."
Natixis analysts said that arrangements to support countries under speculative attack would undermine the no bail-out rules, which "would then be changed in a direction that would probably reduce the euro's credibility and weaken it."
And Marco Annunziata of the UniCredit Group said that a rescue fund "would be nothing else than an admission of failure, an explicit recognition that not only can the Stability and Growth Pact cannot enforce fiscal discipline but also that the eurozone would be unable to design any new mechanism able to enforce fiscal discipline."
German authorities insist that any assistance provided by the fund would have to come with a heavy price for its beneficiaries.
"Strict conditions and a prohibitive price tag must be attached so that aid is only drawn in the case of emergencies that present a threat to the financial stability of the whole euro area," German Finance Minister Wolfgang Schaeuble said.
Still, there remain concerns that Greece in particular could be getting the wrong message.
"The key risk for failure is that Greece may be reluctant to implement the necessary adjustments now, given the associated costs, in the hope that the resultant fiscal difficulties can be solved via external support," analysts at Deutsche Bank commented.