Just when there was some tentative evidence that policy progress was being made in Europe, out come the politicians to throw various spanners in the works.
The head of the IMF, Christine Lagarde, is seeing the posturing as a threat to hopes for a recovery and has sent a very clear message that there remains an "urgent need to implement the policy actions required to secure the global recovery” with Europe "the epicenter of the crisis”.
In Greece, it appears that Prime Minister Antonis Samaras and his government have fudged the numbers on the budget deficit, while Germany’s Chancellor Angela Merkel and French President Francois Hollande are not seeing eye to eye over the timetable to implement essential banking reforms.
Amid these disruptive events, in Greece there is chaos as groups as diverse as tax collectors, judges, train drivers and public servants go on strike in protest against a broad range of cuts and compliance issues so desperately needed if the Greek economy is to ever return to a reasonable standing.
The social unrest in Greece is unnerving. But more importantly, the Greek Finance Ministry appears to be reverting to its deception over the position of the budget. Greece’s Finance Ministry reported a deficit of just €12.5 billion in the first eight months of the year, but estimates from the more objective troika, which is made up of the European Commission, the European Central Bank and International Monetary Fund, are that the deficit is nearer €20 billion.
A reduction in the budget deficit is an essential condition for Greece to qualify for the next round of bailout funds. While this desperate desire for help may account for the budget fudge, if proven, it is an extraordinary breech of trust in the current climate, with the whole premise of the support from other eurozone countries, in particular the Germans, severely undermined.
The troika is currently engaging with the Greek Finance Ministry to get to the bottom of the disparity in the numbers, the fallout from which could be catastrophic.
The concerns in Europe are not confined to Greece.
Part of the overall restructuring of the economy and markets in the eurozone as a whole is a move to tighten the prudential oversight of the banks. The IMF's Lagarde said overnight that there is "the need for a strong and effective banking union … We continue to believe it should be initiated as soon as possible to break the vicious cycle between banks and sovereigns.”
President Hollande shares this view and is anxious for the timetable of reform to be accelerated, saying that "the sooner the better” for stricter controls on bank practices to be implemented. Chancellor Merkel, on the other hand, is stonewalling the pace of reform. In what appears to be a concession to the banking sector, Merkel is keen to go slow, suggesting that the review "has to be thorough, the quality has to be good and then we’ll see how long it takes.”
Clearly, each is playing to their constituency – Merkel wanting to protect the banks from a tougher, more transparent regulatory environment, while Hollande is clearly trying to make the banks at least partly accountable for the recent massive government bailouts which are a key reason behind much of the fiscal mess in France and through Europe more generally.
Banking reform is a vital step linked to government bailout packages, given that the banks have huge exposures to the Greek, Spanish and Italian bonds. Lagarde is increasingly frustrated by the recalcitrance of the Germans, suggesting that "establishing a single supervisory mechanism and enabling the recapitalisation of the banks” is a vital reform if the eurozone is to fully recover.
There is also the problem of Spanish Prime Minister Mario Rajoy and Italy’s Prime Minister Mario Monti prevaricating about implementing the fiscal reform needed to qualify for the ECBs bailout funds. Rajoy appears to be playing with fire over his reluctance to embrace the conditions his government needs to comply with to qualify for the bailout money. Spain is currently projecting a budget deficit of 6.3 per cent of GDP in 2012, although private sector forecasters suggest the deficit could 9 per cent. Spain needs to repair its budget if it is to qualify for the rescue funds.
In Italy, the budget is in a more favourable position, with a deficit of just 1.7 per cent of GDP projected for 2012. But Italy has the second highest debt to GDP ratio in the eurozone, behind only Greece at 123 per cent, which makes the need to return to surplus urgent.
The markets want to see policy makers address the problems and in recent months there has been a more optimistic attitude. If there is any slowdown, backtracking or a weaker policy approach, the market will punish governments and policy makers with a capital flight and even more difficult circumstances than those currently in place.