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Euro crisis returns

By MARTIN WALKER, UPI Editor Emeritus   |   March 11, 2013 at 12:07 AM   |   Comments

BRUSSELS, March 11 (UPI) -- After the success of the Dutch petition for a referendum on ceding any more powers for Europe and word of a new euroskeptic party forming in Germany, maybe the British aren't quite as isolated as the conventional wisdom in Brussels likes to think.

So far, these are just straws in the wind. The new German party isn't yet a reality and seems comprised mainly of those orthodox economists who fear the weakness of the rest of the eurozone sapping German savings and prosperity. The Dutch Parliament is required to take note of the petition for a referendum but not to act on it.

The difficulty is to analyze the difference between a specifically anti-European sentiment and a vaguer resentment at economic conditions. Holland, officially in recession after two successive quarters of economic contraction, has seen one of the deepest falls in living standards in Europe with the government warning glumly of more austerity to come.

After contracting 0.6 percent in the last quarter, the eurozone economies are looking at continued decline this year, albeit at a slightly slower pace. The European Central Bank last week forecast a 0.5 percent drop for 2013. It could be worse. With France suffering its highest unemployment since the 1930s, the French economy is contracting at its fastest rate in four years and Italy and Spain are also shrinking.

Were it not for hopes of a German recovery after a disappointing 2012 the eurozone's prospects would be even worse. But industrial orders in Germany fell 1.9 percent in January. And we shouldn't forget that new car sales in Germany in February declined year on year by 10 percent, in France 12 percent and in Italy 17 percent.

The contrast with the United States, after last week's announcement of a sharp jump in employment and the prospects of a decent 3 percent growth this year, could hardly be more clear. Last week's stress tests on U.S. banks were encouraging while all the big European banks are holding capital rations below those of their U.S. peers, to Standard and Poor's latest calculations indicate.

Bloomberg notes that the European banks have the widest credit default swap spreads, which means they are seen as significantly more at risk. Spain's big banks Santander and BBVA are seen as twice as risky at Citigroup or Bank of America.

Fitch's downgrade last week of Italian debt was one reminder that the euro crisis is far from over and this week comes another as European leaders meet in Brussels to try to decide what to do about Cyprus, one of the smallest European economies but one that that still to be the fatal straw that breaks the camel's back. This week's Brussels summit will be the first for newly elected Cypriot President Nicos Anastasiades, who insisted last week that any haircuts for depositors in his country's troubled banks would be "out of the question."

The sums involved are puny. Cyprus has a gross domestic product of $23 billion, which is almost like a rounding error in European balance sheets; there are banks that posted bigger losses. But the fear is of contagion, particularly with Italy still politically paralyzed after last month's inconclusive election and its banks reporting losses on bad loans. The banks Intesa, Banco Populare and UniCredit are all expected to post losses and troubled Monte Paschi is locked in legal proceedings with Nomura and Deutschebank over disputes over derivatives.

Despite some weakness last week, the euro continues to be reasonably strong against the dollar, thanks almost entirely to the pledge last year by European Central Bank President Mario Draghi to do "whatever it takes" to save the euro. The mechanism for this, announced last September, was a new facility called OMT, which stands for outright monetary transactions, and which was seen as a pledge for the ECB to stand as a lender of last resort, willing to buy a euro member's bonds when the markets refused more credit.

But Draghi's responses in a news conference last week have created uncertainty over the central bank's precise responsibility at such a time of crisis, with analysts from major banks like BNP-Parisbas grumbling that the goalposts were being moved and others requesting more clarity. The exact legal definition of OMT was "still being worked on," Draghi said.

"OMT cannot be used to enhance a return to the market," Draghi insisted, adding that "countries should be on the market by themselves" and be able "to issue along the yield curve, to a fairly broad category of investors and able to issue certain quantities."

So if the markets refuse to buy Italian debt, would the ECB step in? On the basis of Draghi's remarks, not necessarily; but in reality, almost certainly yes. Central bankers tend to be adept at gnomic statements that say little except to reveal the speaker's skills at the art of creative ambiguity.

But this brings us back to the evidence of growing skepticism among Europe's voters as their economies drift back into recession, their governments vow more austerity and their banks refuse to lend. Given the banks' own uncertainties over OMT, and over the prospects for Italy and Cyprus, who can blame them?

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