Stories About The Secret EU Group Meant To Save Euro

EURO

Two months after the bankruptcy of Lehman Brothers in the autumn of 2008, a group of European leaders set up a secret working group, one so secret that it took the name of the “group that does not exist.” Consisting of leading politicians, this group had to ensure the welfare of the euro area.

The group had a single mission, but it was extremely difficult: to find a solution to not let any of the euro area countries to enter into default, writes The Wall Street Journal.

Last year, when Greece gave the first signs of weakness, the Committee, whose existence was kept a secret, had to come up with a plausible strategy.

The official response was delayed long enough that some officials had come to declare that the damage had already been done. The working group tried to find, away from the eyes of the public, a solution to everyone’s taste to the problem of how the euro area should act to help one of its members. But, no solution was ever found.

An investigation started by the American business newspaper, which is based on dozens of interviews with officials from the European Union, revealed that the disagreements that have divided the secret group could have led to the disintegration of the monetary union.

In March 2009, Xavier Musca, a French Treasury official, was preparing to quit his position as chairman of the Economic and Financial Committee, a group of technocrats with a significant influence which administered the EU’s economic policy. Upon leaving, he instructed his successor, the Austrian Thomas Wieser, and presented him his attributions. At the end of the long list, he added, “you must know that there is a group that apparently does not exist.”

The working Group, chaired by the Economic and Financial Committee chairman, met secretly in November 2008 to devise a preventive plan in the vent a euro area member would have a fate similar to that of Hungary in 2008. The membership was obtained only by major politicians – usually no more than one step below the minister – in France, Germany, the European Commission, European Central Bank and from the office of Jean Claude Juncker, Luxembourg Prime Minister that leads the group of the finance ministers in the EU.

The group met secretly and enjoyed the protection of summits and councils in Luxembourg and other European capitals. The meetings were usually held either early in the morning, late in the evening or during meal breaks. The participating members kept their work secret from their colleagues in the government, fearing that a possible leak of information could directly hit the financial markets.

The Group that could break up the euro area

In early May, just hours before Germany and France were about to shake hands and agree on creating a fund worth 750 billion, a safety net for the euro area members experiencing problems, the Finance Minister in France, Christine Lagarde, had announced the delegation that the euro area was on the verge of collapse, according to sources close.

If this pessimistic scenario would have been implemented, the implications would have been major and would have exceeded the EU’s borders. A national chain of bankruptcies in the periphery of Europe could have triggered a new global banking crisis and the consequences for the world’s economy would have been harsher than in the case of the Lehman Brothers bankruptcy.

The ideological differences between Germany and France were the reason for which the decision to implement these measures was delayed. The same differences continue to paralyze the group’s attempts to find solutions to its structural problems. Only a possible collapse of the euro area has led the European leaders to put aside their differences of opinion.

The euro area in danger of falling apart

In early May, with only a few hours before the announcement of an agreement establishing a European Financial Stability Fund, Christine Lagarde, France’s finance minister, told her delegation that the Eurozone is on the verge of collapse, according Sources cited by The Wall Street Journal.

Moreover, the leaders of the major European powers, France and Germany, had to take care of something more than the welfare of their country, namely personal gains.

Nicolas Sarkozy, the President of France, saw in helping Greece a solution which could help increase his popularity.

In contrast, the German Chancellor Angela Merkel knew that people were not willing to pay for the mistakes committed by others.

But the Euro area managed to finally create the safety net for its members. The markets have calmed down, but fears persist and this is extremely obvious if we analyze the cost of credit of Greece and Ireland.

The participation of the IMF, the disputes

Tensions start right from the most important “players”, France and Germany. In the absence of an agreement, several governments in the euro area could collapse and the consequences of the global economy were perceived to be more serious than those that followed Lehman Brothers collapse. The large differences between the economic policy of France and Germany, the representative of the “northern frugal” and “southern relaxed, preventing a rapid and effective response to crisis. Only when they were before the disaster (potential collapse Greece and the eventual collapse of the euro area), the leaders have renounced the differences and reached a compromise.

German representatives felt that EU rules prohibit a state rescue “wasteful”, and France wanted more freedom for mutual help states facing hardships. Also, the Germans did not want too much involvement from the EC, the EU’s executive arm, fearing that this would set a precedent for the EU centralized government borrowing through bonds. This would have meant that Germany, the main creditor of the EU to subsidize other states. Instead, the Germans have proposed that any credit to be contracted directly by the euro area countries, and such country that borrows should obey rules imposed by the government that takes money.

In February, the Greek state already issues could not be ignored. However, officials denied that the issue is on the agenda of the EU’s Special Economic Summit earlier this month. They hoped, according to officials of several assistants, that if markets are not talking about the hardships shake Greece, the state will be able to sell enough bonds to finance. The evening before the summit, Juncker has called on Eurozone finance ministers in a teleconference.

They issued a joint statement, which was to be introduced in the conclusions of the meeting, which promised “support” of Greece. At this point, the committee has opened secret doors all Eurozone members, being excluded only the Greek State.

Angela Merkel, German chancellor, would not consider a package of relief without IMF involvement. In contrast, French President Nicolas Sarkozy, Jean-Claude Juncker and Trichet, ECB president, believed that the IMF’s involvement is unacceptable. Even Wolfgang Schäuble, Germany’s Finance Minister, said that would mean recognition of the weakness of the Europeans.

Which were the political decisions?

Subsequently, more and more voices argued that the two leaders were political decisions: Merkel feared elections in early May, and Sarkozy was worried about the growing popularity of IMF chief Dominique Strauss-Kahn, who may run for presidency France in 2012. The final package for Greece provides relief contributions of 80 billion euros from the EU and 30 billion from the IMF.11