Walker's World: Euro-agony grinds on

By MARTIN WALKER, UPI Editor Emeritus

PARIS, April 15 (UPI) -- The euro crisis is starting to look like death by a thousand cuts. Just when you thought Cyprus was resolved by its European partners, a new crisis has broken out in Portugal where the country's most respected elder statesman Mario Soares has just called on his country to default on its debt and defy its eurozone masters.

Not that Cyprus has been saved. In fact, its plight has deepened. Last week, German Finance Minister Wolfgang Schauble insisted at a summit of his EU fellows that the bailout fund for Cyprus must be limited to the original offer of $13 billion.


That offer was made when Cyrus seemed to need some $21.6 billion and the remaining $8.5 billion it would have to find itself from new taxes, budget cuts and the highly controversial raid on bank deposits.


Now, however, Cyprus needs $30 billion, largely because the impact of the eurozone's bailout policy has weakened the Cypriot economy. The government says it faces an immediate fall of 12.5 percent in the country's gross domestic product.

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In 2011, the GDP of Cyprus was about $6 billion, so officials are now being asked to shoulder a burden that was the equivalent of three years total economic activity in the last year before its crisis exploded.

A cruel irony explains why the Cyprus crisis exploded: Cyprus had invested heavily in Greek sovereign bonds and when the eurozone insisted on a 50 percent haircut on those bonds in return for bailing out Greece, Cyprus lost billions.

Meanwhile at the other end of the eurozone, in return for a $102 billion eurozone bailout Portugal has been following eurozone orders, slashing public spending and boosting exports. Public employees were hit with pay cuts of 20-25 percent. Last week, the country's Supreme Court ruled some of these cuts unconstitutional.

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At the same time, it became clear that rather than recovering, Portugal was sinking deeper into the mire. A leaked report from the Troika (the International Monetary Fund, the European Central Bank and the European Union) said that Portugal's latest funding needs would be another $19.7 billion, one-third more than the shortfall that plunged Portugal into trouble in the first place.


Along with Ireland, Portugal has been given more time -- seven years -- by European finance ministers and the Troika to try to work out its problems. Presumably they hope that recovery is bound to come by the end of this decade.

But for the eurozone, that is a remarkably optimistic assumption. IMF Managing Director Christine Lagarde last week, speaking to the Economic Club of New York ahead of the IMF spring meetings, noted that the world was seeing a three-speed recovery. Emerging markets were doing well, the United States and Switzerland were slowly improving while Japan and Europe were the laggards.

Other than Europe's slow structural reforms of its labor markets, welfare states and public finances, she stressed that the main problem was Europe's banks, with "not enough capital and too many bad loans on their books."

This meant that the attempt to boost recovery though low interest rates wasn't working.

"Monetary policy is 'spinning its wheels' -- meaning that low interest rates are not translating into affordable credit for people who need it," Lagarde said. "The plumbing is clogged up and we are seeing more financial fragmentation. So the priority must be to continue to clean up the banking system by recapitalizing, restructuring or -- where necessary -- shutting down banks."


"The oversize banking model of too-big-to-fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation, more intensive and intrusive supervision, as well as frameworks for orderly failure and resolution -- including across borders, and with authorities empowered to oversee the process," she added.

The problem is that the eurozone is already committed to imposing that kind of cross-border supervision of the economic policies of its member states, despite what elected governments or voters may want; a hard sell in Europe's democracies.

This takes us back to Portugal and to Soares, the veteran social democrat and former president who led his country from fascism to democracy in the 1970s.

Soares called last week for the country to rally to "bring down the government" and fight the austerity policies of the Troika. The government had become a puppet of the eurozone, he claimed.

"In their eagerness to do the bidding of (German Chancellor) Angela Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal," he said. "Portugal will never be able to pay its debts, however much it impoverishes itself. If you can't pay, the only solution is not to pay."


The austerity policies of the eurozone and the pre-election hard line of Germany's Merkel are colliding with political realities. It may be Cyprus, it may be Portugal, it may be Spain or Italy or even France, but as the death by a thousand cuts bleeds the eurozone voters, a rebellion inches inexorably closer.

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