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Growth, Fiscal Union May Emerge from Eurozone Crisis

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With the outcome of Sunday’s coming election in Greece casting shadows over the eurozone, leaders in the European Union are turning from austerity to growth and investigating the possibility of a closer fiscal union. As the clock ticked, Moody’s downgraded one Belgian and five Dutch banking groups, citing economic weakness and the continuing debt crisis.

Bloomberg reported Friday that a draft document prepared in advance of a planned EU summit meeting, scheduled for June 28–29, indicates that leaders of the 27 nations in the group plan to focus on economic growth, improved lending conditions and greater fiscal union.

“Recent developments” have indicated that it will be necessary to advance monetary union “to a further stage,” the document read in part, adding that “more specific building blocks” will be called for to more closely tie budget and banking policies among the 17 eurozone countries. There will also be a call for stronger governance of the euro. A meeting of eurozone countries is planned to follow the full EU meetings.

Political leaders in the EU “will call for further urgent measures aimed at boosting growth and jobs in Europe and enhancing the financing of the economy in the short to medium term,” the document said. Among such measures are project bonds, improving the efficiency of EU infrastructure funds and boosting the capital of the European Investment Bank.

David Mackie, chief European economist at JPMorgan Chase & Co., was quoted saying, “If that summit were to deliver a credible road map to a fiscal and banking union, it could lower borrowing costs for the periphery, as debt restructuring and breakup risks were reduced, and pave the way to a different fiscal objective, focusing on deficits rather [than] debt, and a much easier monetary stance.”

Not just coordinated action but also individual initiatives are in the planning stages awaiting the outcome of the Greek election. Bank of England Governor Mervyn King was quoted saying in a speech late Thursday that in the presence of a “black cloud” from Europe, the case for stimulus in the U.K. “is growing.” He jointly announced with the Treasury a number of measures to cope with the possibility of an escalation in the euro zone debt crisis.

He was quoted saying, “The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead.” Rather than wait for the outcome of the Greek election, he announced a looser policy and the activation of a sterling liquidity facility by the central bank to aid banks. In addition, he said that within weeks a credit-easing operation will begin that could increase lending in the British economy by 80 billion pounds ($124 billion). Reuters reported that Andrew MacDougall, a spokesman for Prime Minister Stephen Harper of Canada, said Canada is “ready to act” should the crisis deteriorate further or if there is “an external shock.” While the Bank of Japan had not yet changed any policy at the end of a two-day meeting, it was reported to have a plan in place should it be needed after the Greek elections. China and India are also preparing contingency plans.

European central bankers are preparing for the possibility of an escalation of market strain in the wake of the election. An unidentified senior G20 aide said in the report, “The central banks are preparing for coordinated action to provide liquidity.”

A conference call of euro zone finance ministers is planned for Sunday night to discuss election results. It is feared that a Syriza victory would lead to a flood of cash leaving the country as Greeks try to preserve their savings against a possible freeze of funds or the devaluation that would result from a return to the drachma.

An official explained that ministers could not wait till the next day, saying, “It is not even about a bank run on Monday morning after the elections. People can now log on to Internet banking and make transfers on Sunday evening as well.”

According to EU officials, while a new government in Greece might be given some latitude in achieving the fiscal goals of the bailout, the eurozone would not simply abandon those objectives regardless of who wins the election. One EU official was quoted saying, “The headline targets cannot be changed. There could be some tweaks to the path to get there, but not the goals.”

As the election drew closer, Moody’s downgraded long-term debt ratings at the Dutch banks ING Groep, Rabobank Nederland, ABN AMRO Bank and LeasePlan Corp. by two notches and SNS Bank by one. It also cut two notches from Belgium’s KBC Groep’s rating.

“Dutch banks will face difficult operating conditions throughout 2012 and possibly beyond,” Moody’s said in a statement, adding that the Netherlands “is affected by the ongoing euro area debt crisis and regional economic weakness.”

“If a Greek exit became Moody’s central scenario, further rating actions on European banks could well be needed,” the ratings agency said.


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