Alan Greenspan, former chairman of the US Federal Reserve, has said that the eurozone is breaking apart due to variations between economies in the north and south of Europe.
Speaking during a question and answer session at the Innovation Nation Forum in Washington on Tuesday, the 85-year-old economist said: “The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system.”
He added: “That stuff [eurozone country bonds held by banks] has always been thought of as the ideal collateral and now it’s getting highly questionable.”
Greenspan pointed out that northern countries such as Germany and Finland have a culture of budgetary discipline, while southern nations such as Greece historically consume more than they produce and build up debt.
“The problem is that there is a growing cleavage in the economic and analytical and banking circles as to whether the euro, which is the crucial issue here, should be 17 countries with very significantly different cultures... That cannot go on,” he said. “The general feeling out there is of a lull before the storm.”
Greenspan’s remarks – widely reported by financial newswires – saw the euro dip against the dollar and the cost of German government bonds, viewed as a safe haven, tick upwards.
His comments were made on the same day that Spain moved a step closer to the northern model. Opposition leader Mariano Rajoy told MPs at an emergency meeting of the Spanish parliament on Tuesday that his Popular Party will back government proposals to insert borrowing limits into the country’s Constitution. “My parliamentary group is ready to support the initiative and facilitate its implementation,” he said. MPs also voted through €5 billion of extra savings by – among other measures – switching to generic drugs in the health service.
The Constitution move follows a similar pledge by Italy, after the cost of borrowing of Madrid and Rome shot up last month.
In July, Eurozone leaders agreed a second bailout package for Greece and new bond-buying powers for its crisis-fund, the EFSF, in a bid to calm markets. But the deal – which allows lending countries to ask Greece for collateral “where appropriate” – is proving hard to implement.
At a party conference in Tampere on Tuesday, Finnish Prime Minister Jyrki Katainen said he is willing to modify his request for Greece to put up to €600 million in an escrow account as a guarantee.
But he refused to drop the plan, despite criticism from Austria and the Netherlands. “Our responsibility is to seek a solution that will be acceptable and tolerable to other eurozone nations,” he said.
Austrian Finance Minister Maria Fekter indicated on Tuesday that Vienna will block the Finnish deal because it increases costs for fellow lenders. “Many countries reject the solution that Finland negotiated for itself to the disadvantage of all others... If there is collateral for one country, then all others must be treated the same way too,” she told the press in the Austrian capital.
Germany has also been dragged into the collateral dispute after a senior member of Chancellor Angela Merkel’s CDU party said Berlin should seek guarantees. “Several states are making big efforts to service their debt. This must be honoured. But to keep up those efforts in the long term, collateral is needed,” said Labour Minister and CDU deputy chairman Ursula von der Leyen on German television.
Eurozone capitals are currently in talks on collateral at “expert level”, amid speculation that leaders will need to call another summit in order to reach agreement.