EU facing crisis over debt, communication

BRUSSELS – The European Union has deployed billions of euros and endless words to try to contain its sovereign debt crisis this year but poor communication and bad timing have left financial markets unconvinced. The communications problems haven’t caused the crisis – excessive government borrowing, inflated bank lending and poor macroeconomic management have done that. But they have exacerbated it, making it harder to stop the rot spreading from Greece to Ireland and maybe Portugal. EU leaders and eurozone officials unaccustomed to speaking publicly on sensitive finance issues have at times misspoken or been contradictory, and new ideas have been proposed when they were less than fully formed, increasing market uncertainty. «Sometimes the solutions put forward and the communications are just too shortsighted,» said Carsten Brzeski, an economist at ING in Brussels who works closely with trading desks. «It’s not the cause of the problem, but several times it has accentuated it. Eurozone officials are simply not used to how to handle the financial markets.» One example last week came from Herman Van Rompuy, the president of the European Council, who, as a former Belgian prime minister and senior budget official, might have known better. Speaking on the day eurozone finance ministers were meeting to discuss a possible bailout of Ireland, with the markets on edge, he described the EU as being in a «survival crisis.» «We all have to work together in order to survive with the eurozone, because if we don’t survive with the eurozone, we will not survive with the European Union,» he said, sending the euro weaker and bond yields soaring on Irish and Greek debt. Yesterday, German Finance Minister Wolfgang Schauble warned the euro was at stake, denting its value. After Van Rompuy spoke, Olli Rehn, the European commissioner for economic and monetary affairs and one of the most prominent figures handling the crisis, was quick to dismiss talk of «existential alarmism.» But the damage had been done. Planning ahead Addressing the European Parliament on Monday, Rehn acknowledged the delivery of the message had to improve. «We need to explain better why we are doing what we are doing, and we have to reassure our citizens. These are tough and confusing times. They have brought forward nervousness and misinformation and therefore we all need to do our share in communicating properly on the challenges,» he said. Communication is only part of trying to calm financial markets and overcome the crisis. Most of the work clearly needs to be done by Greece, Ireland, Portugal and Spain to get their budget deficits and debt levels down and shore up banks. But that is going to take years and is often only measurable in data released by the month or quarter. In the meantime, EU officials are being urged constantly to comment on the rapidly changing situation, providing more grist for the mill. «We’re asking people to provide leadership as politicians and sometimes you want them to say things clearly, but that gets broken down by financial markets,» said Janis Emmanouilidis, a senior analyst at the European Policy Center, a think tank. «You have to be very careful these days and it’s not just the financial markets. In the EU, if someone says something, it gets examined and broken down by the capitals in every member state. The situation is so tense among 27 states and the markets. It’s a difficult balance to maintain.» One of the most unsettling issues for markets has been Germany’s push to create a permanent system for handling eurozone crises. Chancellor Angela Merkel wants it because the current system is taxpayer-funded and may violate a clause in the EU’s fundamental treaty against bailouts. The system, to be introduced from mid-2013 if EU member states agree on how it would work, would involve private bondholders – banks and investment funds – taking a hit on sovereign debt holdings if a country defaults. The idea is sound in principle – there’s no reason why private sovereign bondholders should have a one-way bet with taxpayers effectively bailing them out in a crisis – and many in the financial markets acknowledge that. But because the mechanism is still being worked on, there’s no clarity on how much of a hit bondholders would have to take, or how defaults or debt restructurings would be handled. As a result, markets have begun pricing those concerns into riskier debt, marking down the price of Greek, Irish and Portuguese bonds further and aggravating the crisis. «When it comes to the permanent crisis mechanism, the Germans totally underestimated the market impact,» said Brzeski. «We are now in a situation where markets are hanging on the lips of politicians… but they are not always up to the communication skills and not always very well advised.» The solution, some analysts suggest, is for a single official with long experience of handling markets, such as European Central Bank Governor Jean-Claude Trichet, to take the lead. But the European Union does not work like that. The alternative, others suggest, would be for EU officials to keep quiet until they have a clear and precise plan worked out to stop the debt contagion from spreading any further.