German Chancellor Angela Merkel makes her closing remarks at the 23rd Christian Democratic Union party congress in Karlsruhe on Nov. 16, 2010.DANIEL ROLAND
While Ireland is dragged kicking and screaming into Room 101 of the European Financial Stability Facility, another euro zone miscreant is being financially waterboarded in a different cell at EFSF headquarters. Greece is suffering a delay in the payment of a €9-billion instalment on its bailout loan after Austria refused to release its portion of the funds. The tiny Alpine state is grumbling about paying its part of the next tranche because Greece isn't meeting the deficit-reduction conditions of the deal.
You will recall that a rescue package for Greece was agreed by the euro zone partners in the spring, a €110-billion facility that would be doled out over three years, subject to Greece agreeing to reduce its public sector deficit with a gruelling program of spending cuts and revenue increases. Unfortunately, as reported here earlier, Greece is struggling to meet the targets and on Monday the Greek government revised its reckoning of last year's budget deficit from 13.6 per cent to 15.4 per cent. A sniffy Josef Proell, the Austrian finance minister said the numbers from Greece gave him "no reason to approve the December trance".
The Greek finance ministry said on Wednesday that a delay in the payment of the €9-billion from December to January would not give them any cash flow problems but it does concentrate minds. Recipient EU member states had become used to treating the union as a huge cash cow at which junior calves could suckle at will, but the political mood has changed markedly. Henceforth, the pennies will be counted, the "i"s and "t"s in loan agreements will be dotted and crossed. It is too early to say it with certainty but there is in this wind of change across Europe a whisper of the notion that there is no longer an EU free lunch.
If such ideas are catching on, it has nothing to do with Britain -- the sneering EU partner sitting perennially on the fence -- but because of Germany's new emboldened stance. In particular, it is the now strident Angela Merkel, who on Wednesday bought space in Germany's leading newspapers to celebrate Germany's rapid economic recovery and thank voters for making it happen. It's a political propaganda, published a day after a convention of her party, the Christian Democrats where she consolidated her power and gained in domestic opinion polls. But make no mistake, Ms. Merkel is on a roll and it means that one important item on her agenda, the reform of the economic governance of the EU has a good chance of succeeding. She has the domestic backing and the economic clout to make it happen. The straitjackets in which Germany is binding the prodigal peripheral states is a show of strength and she is gaining support in her demands that bondholders take some of the pain in EU debt restructurings.
This threat will have repercussions that go much further than the rag, tag and bobtail on the EU periphery. The yield on French debt is climbing, nowhere near the levels of the crisis-ridden EU states, but France has its skeletons in the closet, notably the pension costs hidden in nationalised industries. When the periphery states are tied down, the bond market may turn its attention to bigger targets.
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