ECB Prepares Legal Ground for Euro Rupture as Greek Crisis Escalates

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by Ambrose Evans-Pritchard: A
Global Fiasco Is Brewing in Japan

 

 
 

Fears of a
euro break-up have reached the point where the European Central
Bank feels compelled to issue a legal analysis of what would happen
if a country tried to leave monetary union.

“Recent
developments have, perhaps, increased the risk of secession (however
modestly), as well as the urgency of addressing it as a possible
scenario,” said the document, entitled Withdrawal and expulsion
from the EU and EMU: some reflections.

The author
makes a string of vaulting, Jesuitical, and mischievous claims,
as EU lawyers often do. Half a century of ever-closer union has
created a “new legal order” that transcends a “largely
obsolete concept of sovereignty” and imposes a “permanent
limitation” on the states’ rights.

Those who suspect
that European Court has the power pretensions of the Medieval Papacy
will find plenty to validate their fears in this astonishing text.

Crucially,
he argues that eurozone exit entails expulsion from the European
Union as well. All EU members must take part in EMU (except Britain
and Denmark, with opt-outs).

This is a warning
shot for Greece, Portugal, Ireland and Spain. If they fail to marshal
public support for draconian austerity, they risk being cast into
Icelandic oblivion. Or for Greece, back into the clammy embrace
of Asia Minor.

ECB chief Jean-Claude
Trichet upped the ante, warning that the bank would not bend its
collateral rules to support Greek debt. “No state can expect
any special treatment,” he said. He might as well daub a death’s
cross on the door of Greece’s debt management office.

This euro-brinkmanship
must be unnerving for the Hellenic Socialists (PASOK). Last week’s
€1.6bn (£1.4bn) auction of Greek debt did not go well.
The interest rate on six-month notes rose to 1.38pc, compared to
0.59pc a month ago. The yield on 10-year bonds has touched 6pc,
the spreads ballooning to 270 basis points above German Bunds.

Greece cannot
afford such a premium for long. The country must raise €54bn
this year – front-loaded in the first half. Unless the spreads
fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc
of GDP within three years. As Moody’s put it, Greece (and Portugal)
faces the risk of “slow death” from rising interest costs.

Read
the rest of the article

January
19, 2010

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