The FT begins to have doubts

When Martin Wolf of the DG FTstarts saying things like this,

The Eurozone's political glue may be about to melt

then the waters in Brussels are getting very choppy indeed, he is talking about the variety of structural problems that are currently besetting the Eurozone, and the existential threat to the European Union project as a whole. It is almost as if he has had a damascene conversion and joined UKIP overnight. At least his economics seems to have done. It is all about the ability of currencies to float, pan national interest rates being damaging, the whole nine yards.

This is his summing up,

So the big question now is not whether the eurozone can avoid a wave of fiscal cum financial crises. The question is whether the union will survive. The article this week by José-Ignacio Torreblanca of the European Council of Foreign Relations in Madrid, with its complaints about German attitudes, suggests the answer might be: no.

This is a political more than an economic issue. It is possible for a currency union to survive sovereign defaults. The question is, rather, whether members believe the arrangement remains beneficial. The difficulty for surplus countries is that they must finance those in deficit, accept external adjustment or push the eurozone into external surplus. The difficulty for deficit countries is that the cost of leaving the eurozone is to face debt crises. If those have happened already, the costs will seem smaller. If they think they have replaced currency crises with credit crises, which do not even restore competitiveness and growth, they may see the union as a bad deal. Political glue could melt. Such calamities do happen. It is now up to the members to see that they do not.

More panic in the Eurozone

The EU Observer has picked up what might be called in Brussels unhelpful comments by Slovak finance minister Ivan Miklos,

Even during current conditions that are very tough, very complicated, and when the risk of the eurozone break-up - or at least of its very problematic functioning - is very real

What with the contagion spreading to Belgium, who without a Government is ill placed to deal with it things are beggining to look just a tad ropey.

Eurozone in ‘survival crisis’

Whilst all eyes turn to the Royal wedding, Herman Van Rompuy is concentrating on another thing entirely,

The President of the European Council says the eurozone is in a "survival crisis" as a result of Ireland and Portugal's debt burdens and potential need for bailouts.

The economic bad news just keeps ramping up for both the currency and the Eurozone itself and no amount of future bunting is going to keep the wolves from the door.

Ahead of the euro finance ministers meeting today, van Rompuy said: "We all have to work together in order to survive with the eurozone, because if we don't survive with the eurozone we will not survive with the European Union. But I'm very confident we will overcome this."

I have no doubt it will survive, but at what cost to jobs livelihoods and lives?

And the first to agree to German law are the Austrians

I was reading Ambrose Evan's Pritchards rather doomy and inflamitorily titled post from a couple of days ago just now,

Europe's fiscal Fascism brings British withdrawal ever closer

when a tweet from Slugger honcho Mick Fealty popped up.

@mickfealty Berlin calls for eurozone budget laws http://tinyurl.com/2wfy9ol #FT

And it looks like a transparant power grab from Berlin,

The German government is to press other eurozone countries to adopt their own versions of Berlin’s balanced budget law as part of a set of sweeping reforms to stabilise the euro.

There is some idea that each country would be free to set upo there own version of the German law, yes, but this is all getting err... a bit concerning.

And yes in a pre-Anchluss moment we have Austrian support,

A German government official told the Financial Times that one of Mr Schäuble’s proposals would be for other eurozone countries to adopt similar fiscal constraints to Germany’s Schuldenbremse – as the law is known.

“Something like that would be a good idea for other countries to have – although it might take on different shapes and forms for each member of the eurozone,” the official said.

The severity of the euro crisis could give impetus to Berlin’s proposed reforms, which would have been unthinkable even six months ago.

The idea has won the the backing of the Austrian government. “Considering the high indebtedness in Europe, I am in favour of a Schuldenbremse,” Josef Pröll, Austria’s finance minister, told German newspaper Die Welt.

“This would lead to a clear cap on new debt, strict budgetary discipline and balanced budgets in Europe,” he said.

Will one size fit all? And will this just be for the Eurozone, or will it be brought in under Article 122 of the Lisbon Treaty which of course means it comes under QMV?

What happens when the legions leave?

In the year 410, the succesful and prosperous Roman colony that was Brittania wrote to the Emperor for military help. Flavius Augustus Honorius wrote back saying sorry but as the Visigoths had just sacked Rome all shore leave was cancelled and the legions were neeeded to protect the city of God. Britain would have to look out for itself.

In a way this is synonymous with what is happening with the banking sector in Eastern Europe. As this perceptive paper from Breughel points out,

the perception has developed in some new member states that solidarity is in short supply when crisis strikes.

A perception that has led to the Hungarian letter. One of the points that the paper makes is that in many eastern countries the banking trade is almost completely dominated by subsidiaries of Western banks.

See table. In the main these eastern subsidiaries have been pretty conservative, unlike their western parents who are all snarled up with toxic debts and what have you. However despite their financial reticence they are being asked by their head offices to retrench and send back the profits etc home. This of course results in the Eastern subsidiaries being hamstrung, and unable to lend as they would like to local individuals and enterprises.

Much as the legions left Britain to defend Rome, money is leaving the east to sort ot the corporate vandals and visigoths at home.

Or as the paper puts it more intelligably,

Asymmetric liquidity and credit management.

In times of stress liquidity management and credit distribution decisions are not only driven by long-term profit maximisation. While western European parent banks did provide continued access to liquidity for subsidiaries, anecdotal evidence suggests that in periods of heightened stress some of them have prioritised hoarding liquidity at home.
Banks may also curtail credit asymmetrically in the future. This could either be a rational response to deteriorating economic conditions in the new member states, or a result of commitments to maintain or increase credit in the home country as a counterpart to public recapitalisation.

Or it could lead to doom for Eastern European econnomies.