However, after last week’s discussions in Helsinki, the canny northern Europeans spelled out their conditions.
Before the ESM can bail out banks, they insisted that the eurozone-wide banking union must be “established” and its “effectiveness ... determined” — which is a tough hurdle, since the plan so far remains a glint in European Commission President Jose Manuel Barroso’s eye.
More importantly, they insisted that “legacy assets” — that is, all the dodgy loans from the credit crisis era, must remain “the responsibility of national authorities.”
At a stroke, they seemed to dash Ireland’s hopes of receiving help from its eurozone neighbors for the cost of its massive banking bailout and undermine Spain’s hopes of repairing its financial sector without Madrid going cap in hand to the troika.
However, most damagingly, the announcement from Helsinki underlined the fact that, in the long-running eurozone crisis, the devil is always in the detail.
With Spain still firmly in the markets’ crosshairs, Italy’s moment of danger appeared to have passed, at least for the time being. However, after 30,000 strikers forced the closure of the Colosseum on Friday as they marched in Rome against the government’s public sector cuts, political support for austerity in the eurozone’s third-largest economy is looking increasingly fragile.
A year into a deep recession, technocratic Italian Prime Minister Mario Monti, installed in November last year after intense pressure from the markets and eurozone politicians helped force former Italian prime minister Silvio Berlusconi out of office, is struggling to meet his budget goals. His support is also fading — though he said last week that he might agree to stay on if elections, due to be held in the spring, failed to yield a definitive result.
He has acknowledged the concerns of protesters, saying his austerity policies have subjected the public to an “unprecedented amount of sacrifices.”
When Draghi announced his policy of outright monetary transactions, the expectation in financial markets was that Italy would follow Spain in asking for an official EU bailout so that it could benefit from the scheme, which is designed to bring down weaker governments’ borrowing costs by buying their bonds.
However, that would be a severe political humiliation — and, what is worse, it is not even clear that Europe has the money.
As Lombard Odier analyst Karen Guinand put it in a research note last week: “If and when Spain does appeal for help, another problem will then emerge: much of the EFSF/ESM [European Financial Stability Facility and ESM bailout fund] resources would probably be used up ... leaving little for Italy.”
Once a Spanish bailout happens — and most analysts now believe it is a case of when, not if — attention will inevitably turn to Italy, just as the country gears up for a general election in which Berlusconi and his supporters are expected to run on an anti-euro ticket.
The former prime minister last week described the single currency as a “big swindle”; staying inside the euro will require more painful sacrifices, and Italians may decide that they have had enough.
Rumor has it in Brussels that eurozone politicians have sworn not to push Greece out until after US President Barack Obama is safely back in the White House. However, few analysts believe it has a long-term future in the single currency.