Germany holds the key to the euro's future

Angela Merkel is the most powerful and most vulnerable player in the debt crisis.

We have had yet another day of turmoil on the markets and yet another example of "kicking the can" by the eurozone's leaders. This morning, with great reluctance, the European Central Bank (ECB) started to buy Italian and Spanish government bonds to pacify panicked financial markets. It has worked today -- bond yields on Spanish and Italian paper have reduced -- but it won't hold for long.

In the last few days, the likes of Herman Van Rompuy and Economic Commissioner Olli Rehn have taken to the airwaves to state that the markets should not be attacking Italy and Spain. On paper, their credit-worthiness looks reasonably sound: Spain's debt to GDP ratio of 60 per cent is lower than that of Britain, Germany and France, while Italy runs, at 4.6 per cent in 2010, one of the lowest budget deficits in the EU.

But this doesn't matter. The banking sector crisis in Spain may not be finished yet, and the country is suffering from chronic unemployment levels. Italy's debt burden is 115 per cent, second only to Greece. More importantly, the markets know that the 21 per cent haircut on Greece's debt burden is probably just the start of large private sector losses, the price of reckless lending. A significant restructuring of Italian or Spanish debt would bankrupt numerous European banks. In particular, Franco-German banks are exposed to nearly €1 trillion of Spanish and Italian debt.

The bond market won't stabilise until the financial sector is satisfied that eurozone debts, or at least most of them, are underwritten. With Germany the largest and richest country, the responsibility for the eurozone's future lies with them, and with the choices facing the eurozone being expensive and politically toxic, this makes Angela Merkel the most powerful and most vulnerable player in the debt crisis.

Maintaining the current eurozone arrangement can only be achieved by swallowing some very bitter pills. Firstly, the funding capacity of the European Financial Stability Facility (EFSF) would need to be increased from €440bn probably to around €1.5-2 trillion so that it could, if required, underwrite a large chunk of Spanish and Italian debt as well as the smaller EU nations.

Secondly, the euro area countries will have to issue common eurobonds. Eurobonds have suddenly become very popular in the UK -- George Osborne, Ed Balls and Nick Clegg now all think they're essential, even though the Treasury was implacably opposed to them a couple of months ago -- and they enjoy support from most centre-left and some liberal parties across the EU. Merkel's Christian Democrat party and their coalition partners, the neo-liberal Free Democrats, view eurobonds with terror. During negotiations on the EU's economic governance package, government ministers and the European Parliament demanded the establishment of a European debt agency to issue eurobonds. Germany was totally opposed, although the European Commission will submit draft legislation on eurobonds to the Parliament and Council this autumn.

Both measures make economic sense. With bond spreads on 10 year paper at over 6 per cent, Italy is not far away from being unable to fund its debt, while Greece, Ireland and Portugal may need to restructure their debts. Guaranteeing a large chunk of that debt and allowing the EFSF to buy Italian (or indeed other country's) bonds would ease the fears of large sovereign defaults. Moreover, with the markets becalmed, EU leaders could reform the governance of the Eurozone and try to resolve the bank capital crisis that has helped create the government debt crisis.

But the costs of these measures are very high, both economically and politically. Germany has already committed guarantees of €119bn out of the €440bn EFSF. Increasing the EFSF's funding capacity to €1.5 trillion or more would require a contribution of up to €500 billion. If that isn't enough to make the German taxpayer's eyes water, then common eurobonds, even with an AAA credit rating, could still be more expensive than Germany's current bonds. To borrow the language of Yes, Minister's Sir Humphrey Appleby, forcing these measures through the Bundestag would be 'brave'. In other words, it would cost Merkel the next election or lead to the collapse of the coalition.

The other alternative is for the eurozone to divide between, broadly speaking, the north and the south using a "hard" and "soft" euro. The economic consequences would be unknown and, to all intents and purposes, this would end the euro project launched less than twenty years ago by Germany and France.

So Chancellor Merkel has the fate of the euro in her hands and we will soon find out how much Germany is prepared to pay for the euro. Don't expect swift resolution of the crisis because kicking the can down the road for a few more months is theoretically possible, even though it is an increasingly expensive exercise in futility.

Ultimately, saving the euro will be expensive and unpopular, but the costs are known. The price of the euro's demise doesn't bear thinking about.

Ben Fox is chairman of GMB Brussels and political adviser to the Socialist vice-president of economic and monetary affairs.

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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