Euro-apocalypse delayed?

It was more than seven years ago when champagne celebrations marked Malta's triumphant entry in the EU club. This was followed by fireworks and expressions of joy after a closely fought internal referendum which returned a majority of over 53% of the electorate who voted to join the EU in 2004. In 2008, in a smooth transition, Malta discarded the lira and embraced  the euro. It was thanks to a concerted effort by all stakeholders who concurred for six months not to raise prices following the over night conversion from lira to euro.

This pact of solidarity signed by most importers and wholesalers vowed to maintain a price stability. It was religiously observed and worked like clockwork thanks very much to the zeal and enthusiasm of the ubiquitous euro conversion team leader Alan Camilleri. 

Now, three years later and the honeymoon period may soon be over, as we notice the newlyweds are contemplating divorce. If euro breaks up, will the old currency be resurrected? Imagine if the worst happens, and the euro coins and notes where to be collected in exchange for freshly-minted lira proudly showing printed prominent smiling faces. It would be a nasty U-turn. Euro sceptics in Malta are having a ball as they sneer at critics who proved them wrong when extolling the virtues of joining the euro in 2008.

Then euro was rated the best thing in our recent financial history meant to open wide open the doors to prosperity. Certainly, it provided a good shelter when the sub-prime crisis hit the fan. Yet for a moment, imagine the grim resentment felt by the public if three years later, they are faced with the humiliation of reconverting their savings back to the old decimal currency (probably the Malta lira).

Banks will give up the ghost, faced with the nightmare of a potential run on deposits while the cost of converting the ATMs, cash registers, credit cards and accounting software will not be welcome - especially at a time of an economic slowdown. As can be expected, people will protest in the streets in their thousands, fearing their lives will suffer particularly as  inflation soars.

It is certainly a nightmare nobody would be willing to endure, but then why are British embassies in the eurozone been told to draw up plans to help British tourists through the collapse of the single currency, amid new fears for Italy and Spain?

This news item has caused any international confidence in the euro to evaporate, and surprisingly even German bunds have lost their 'risk free' status. Is the Teutonic giant not Teflon-coated, and is it not immune from the Mediterranean curse?  Suddenly, it is as if no-one wants to hold euro denominated assets of any variety, and that includes what had previously been classified as the eurozone safe haven of German bunds. Is this the tell-tale sign that the end of the euro empire is imminent? Ask the Economist newspaper, which featured a front cover depicting the end of euro. Who knows whether the colossal meeting planned in Brussels will be successful to concoct the elixir that will resurrect the ailing currency? The German Chancellor, Angela Merkel, and the French President, Nicolas Sarkozy, will meet in Paris on 9 December in the hope of agreeing on the fine print of a long-term credible plan based on fiscal union. 

More on this issue later on in this article, but for now let us judge whether taking out insurance against the possibility of euro collapse is justified, particularly when announced by the British government. At this juncture, can the English politicians be blamed for acting too hastily, when British banks have stopped lending to all but their safest eurozone counterparts, and even those have been denied access to dollar funding? Is it a case of the kettle calling the pot black? The sterling hardly has anything to boast about; just stop and ponder on serious problems arising from a dysfunctional UK economy not so dissimilar to the misery faced by the weaker links of the euro chain. Perhaps we are too hasty in condemning the monumental euro project as a failure - doomed to be marooned to the dustbin of history. Surely, sterling, with its shaky credentials, cannot qualify to the next currency to replace the euro come next Christmas.

Still, can you blame the UK chancellor for drafting contingency plans to salvage the financial chaos that would grip most of Europe in case Santa Claus administers the funeral rites of the currency so much loved by the technocrats (busy in cold corridors of the Brussels ivory tower)? Bankers are cautiously preparing for what can be termed the biggest mass default in history (overtaking Argentina going bust in 2001/2).

There's no orderly way of smoothening the blow while pundits say it will lead to unbridled social unrest and even anarchy.

Still, urgent consultations are ongoing to help the patient now in intensive care in a sick bay. Just consider how the IMF is rumoured to be on alert to engineer a multi-billion-euro rescue of Italy.

Reports talk of a €600 billion assistance package for Rome in return for tough austerity and structural deficit adjustment measures, according to an article in Italian daily La Stampa. Spain, meanwhile, may not need a full bail-out programme and may be offered a credit line instead. Back to the German and French duo, who are working hard to reach an agreement on how best to save the currency and return stability in the financial markets. Their proposals will be shortly presented to the European leaders at the next EU summit. The blueprint is expected to safeguard banks and put forward additional funding proposals conditional on meeting German demands for tougher fiscal policies. German chancellor vowed to create 'fiscal union' across the eurozone and is adamant about the need for treaty changes to prevent future catastrophes saying the process was already underway but has to remain ongoing to crack down the European debt crisis which she described as "the most difficult chapter in the history of the euro".

The European capitals seem to have no choice to the plan of a fiscal union as it offers a glimpse of optimism in this era of gloom and doom. 'Fiscal union' is a bitter pill. It would provide a centralised control over tax and expenditure policies of all member countries and according to Merkel the EU is "not just talking about a fiscal union but starting to create one".

She reiterated the importance of finding "effective answers to chastise those who continue in rule breaking" and to ensure that EU members meet their obligations and abide by the regulations by creating a "stability union" which will enforce budgetary discipline.

Backed by the Netherlands, Merkel demands the implementation of an independent European "stability commissioner" like a Tzar that would have the fiscal power to veto budgets of eurozone countries.

On the other hand, France is not at ease with the prospect of automatic sanctions for fiscal rule breakers and proposes an informal agreement wherein heads of State would impose sanctions if necessary, but instead favours a greater involvement of the ECB.  The latter proposal seems to be seeing the initial signs of a mellow approval from Germany and according to Draghi, president of the ECB, might be willing to take further action to support struggling countries by channeling rescue money through the International Monetary Fund on condition the eurozone seriously moves towards a fiscal union. 

"A new fiscal compact" is "definitely the most important element to start restoring credibility," ECB President recently said in an address to the European Parliament in Brussels. While Germany is annoyed with costly bailouts, it wants an austere EU system, but Sarkozy is under fire from political rivals who criticise the idea of passing Brussels more control of public finances.

Berlin and Paris are being pressurised into seeing eye-to-eye in a crisis that has split them on issues such as the role of the ECB in lending to struggling member states and on the issuance of joint euro bonds. Future talks between Angela Merkel and Nicolas Sarkozy will keep investors with bated breath as European leaders hustle to finalise a balanced rescue package of up to €2 trillion by leveraging the EFSF. Many hope such initiatives succeed to reconcile deep differences between the two leaders and determine how a fiscal union could work out. 

Both counterparts agree that those nations in financial difficulty will definitely have to surrender some independence on their fiscal budgets in exchange for financial assistance from the stability fund. Berlin and Paris hope to unify their budgetary proposals into a single amended protocol and therefore avoid the need for 17 excruciating national referendums on ratification. To conclude the Iron Lady (a Lutheran brought up in Eastern Communist Germany) stated, that there is "no quick and simple solution" to the crisis.

The magic needs to work and work fast otherwise there will be an imaginable confusion in the new year as depositors make a run for their money and central banks will be under extreme pressure to calm financial institutions. If apocalypse can be delayed while a lasting solution is found to resuscitate the ailing currency, it will be the best gift Santa Claus can deliver in the European Christmas stocking.

The writer is a researcher in financial subjects with PKFMalta

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