Back in the Old Euro Denial Routine

Amplify’d from professional.wsj.com

Back in the Old Euro Denial Routine

The euro zone is ratcheting up the pressure on Portugal to seek an aid package, but in a manner that makes it possible for government leaders to deny they are doing so, and maintain the appearance of national sovereignty.

The finance ministries of Germany and France have both denied that they have tried to persuade the Portuguese government to follow Greece and Ireland in seeking a bailout from the European Union and the International Monetary Fund.

As with Greece and Ireland before, „sources” from other euro-zone governments worry about Portugal’s ability to borrow from the international bond markets.

AGENDA

Inevitably, come Monday morning, investors reacted to the weekend speculation about Portugal by selling its government’s bonds. That move was later reversed, thanks to purchases of Portuguese bonds by the European Central Bank.

It could be that euro-zone policy makers are just very bad at communication and have very little understanding of how bond markets work.

It is certainly the case that throughout the fiscal crisis, the size and complexity of the euro zone’s policy-making apparatus has made it difficult to craft a single message and stick with it for very long.

But there is also a consistency and regularity to the way euro-zone policy makers have behaved in the run-up to each bailout. Officially, they insist that it is up to the individual government to request help, and that nobody is being put under pressure to choose that option.

This tactic saves the appearance of a euro zone that still comprises independent nations free to exercise their sovereignty, while in fact giving preference to the needs of the euro zone as an entity.

Governments that are reluctant to admit failure because of the domestic political consequences are forced to take action that is considered necessary for the good of the currency area as a whole, and prevent contagion.

But at least one government minister has broken ranks. Shortly after the Irish government agreed to take €67.5 billion ($87.4 billion) in loans from the EU and the IMF, Minister for Justice Dermot Ahern gave his version of what had just happened.

„There were people from outside this country who were trying to bounce us …into making an application-throwing in the towel before we had even considered it as a government,” Mr. Ahern told state broadcaster RTE Radio in late November.

„If you notice they are doing the same with Portugal now because they fear that Portugal will now cause contagion,” he added.

Except that, thus far, the euro zone’s preference for „bouncing” members into taking help hasn’t prevented contagion. Already economists are calculating how much it will cost to rescue Spain, which is seen as next on the list for help.

„Given the fact that the existing funding facilities will not be large enough to provide full three-year funding to Spain, we regard a significant extension of the facilities as necessary in order to calm markets,” economists at Citigroup wrote in a note Monday.

„Portugal will not need a bailout,” Spanish Minister of Finance Elena Salgado said in a radio interview Monday.

So the most plausible way to read the official leakage on Portugal is this: there is an effort under way to force the Portuguese government to accept aid by forcing its cost of borrowing up to levels that make it impossible to refinance its debt and cut its budget deficit.

This tactic appears designed to preserve the appearance of national sovereignty within the euro zone, while ensuring that members ask for help sooner rather than later in an effort to stop the rot.

But it may be the last time we see it. Euro-zone policy makers have long regarded Spain as the battle that has to be won. Given the scale of the funds needed to aid the fourth largest economy in the currency area, euro-zone policy makers are unlikely to suggest that it can’t survive without outside help, unless they really don’t know what they are doing.

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