Euro's make-or-break moment is looming

You have to hand it to the eurocrats of Brussels.

The continent may be in economic turmoil; its biggest and most ambitious project is close to collapse and it is stuck in recession. And yet they still manage to engineer a month of relative calm so that they can enjoy a month-long summer holiday.

August has been exceptionally quiet by recent euro standards – so much so that to the outsider it might almost feel as if the crisis is over. Don’t be fooled.

The euro crisis will return in the coming weeks – and by the end of the year we are likely to learn whether it will claim yet another victim (Spain, likely recipient of a full-scale bailout) and depose one country entirely (Greece, whose days in the single currency still look numbered).

So for those returning from holiday, here’s a reminder of the four big issues to be confronted by the eurocrats in the coming months, in more or less chronological order.

1. ECB: will they, won’t they?

Next Thursday brings the next meeting of the European Central Bank, and the big question is whether it will unveil a full-blown quantitative easing programme to buy up government bonds, potentially even introduce a target ceiling for troubled countries’ debt yields. ECB President Mario Draghi has actually cancelled his appearance at the big summer central banker shindig in Jackson Hole because of the preparatory workload. And given that the German representative on the ECB governing board, Jorg Asmussen, seems more reconciled to such a move, investors are hoping for something impressive. The problem is, any decision might be incumbent on…

2. German constitutional court decision on ESM

Germany’s Parliament, the Bundestag, has already ratified the creation of the new European bailout fund, the European Stability Mechanism, but this needs to be approved by the country’s constitutional court on September 12 (six days after that ECB decision). There are some who complain that the ESM undermines German constitutional sovereignty, since it involves a degree of socialisation of debt across the euro area. Some also suggest that it breaches the fundamental Maastricht rule that there should be no bailouts within the euro. And clearly they have a point. However, the court did approve the creation of the ESM’s predecessor, the EFSF, and gave a provisional thumbs-up to the ESM, so European insiders are confident that the court will decide in favour of the ESM this time around as well.

3. Wither Spain?

It’s fast becoming clear that Spain may need further help from Europe in order to keep itself economically afloat. It has already announced a bailout of its banking system, but this has failed to prevent the investors’ exodus from the country. The Bank of Spain announced earlier this week that the country’s banks had seen a 5% plunge in levels of bank deposits in July – taking the total deposit loss over the past year to more than 10%. Meanwhile, the country’s cost of borrowing has been creeping up in the past few weeks (10-year bonds now command interest rates of more than 6.5%), and Catalonia – the region that includes Barcelona – has officially requested a €5bn rescue package from the central government. The suspicion remains that Spain will need a full-scale bailout from the ESM. The only questions are: how much, and what kind of conditions will they have to accede to?

4. Whither Greece?

Yes, Greece all over again. The trio of institutions which provided the country with bailout cash – the Troika – are back in the country inspecting its finances in September. They are due to complete their assessment by early October, but there are likely to be leaks about the country’s economic health before then, and if they are anything like the previous Troika missions, they are unlikely to be encouraging. The likelihood is that the country will fail to meet many – if any – of the bailout targets it has been set. Which will imply it will either have to delay the payback of its bailout cash or ask for more money. That in turn will beg the question of whether institutions such as the European Commission, ECB and International Monetary Fund actually want to keep pouring money into a state which is failing to meet their conditions. In other words, is this finally the moment they will let Greece leave the euro?

In the meantime, it is well worth reading this op-ed by Mario Draghi in the German press today. The gist is that it is possible to have a euro without having to have full-blown political and fiscal union. This may well be true in theory, but it is unlikely to be true in practice.

The manifold bailouts over the past few years (and likely in the coming months) mean that the euro has already necessitated fiscal transfers in order to survive. The Rubicon has already been crossed. It really is make-or-break time for the single currency.