By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Avoiding the great Greek scare hasn’t allowed the euro zone to breathe a sigh of relief on Spain. Yields on the country’s 10-year bonds are now reaching 7.2 percent. The Spanish government has already done a lot. The extra steps it could take are of marginal importance in the current context.

Markets aren’t listening to Madrid. What matters is that the euro leaders come up with a credible road map to overhaul monetary union at their end-of-month summit.

It’s time to end the alphabet soup – plan A, plan B etc – and come up with a grand plan. The euro leaders’ collective fault is to have let markets even imagine that Spain could be bailed out – or even that it could possibly leave the euro. If they don’t want either to happen, they must act fast.

What is needed is a powerful message that the euro zone is integrating, not disintegrating. It may start with the launch of a fully-fledged banking union, as Mario Draghi and French President François Hollande advocate. It will not happen overnight. Angela Merkel doesn’t think it is possible without a fiscal and even a political union: this should be a good incentive for the French president to accept the type of sovereignty transfers that France has historically refused – even if the price is that some structural reforms might be forced on his government.

The second challenge euro zone leaders must tackle is the consequence of austerity on the region’s economy. Greece, Ireland, Portugal and Spain are bleeding. No one advocates that their governments should stop cleaning up their budgets. But indiscriminate spending cuts hurt demand, and income tax hikes hurt competitiveness. More time will be needed to reach the fiscal targets agreed. There is no avoiding that basic fact. And the ECB may want to confirm its hints that it is ready to lower its key interest rates next month.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Financial desperation combined with diplomatic inexperience could end up costing the euro zone dearly. France, Italy and Spain seem to think that presenting Germany with the same demands, over and over again, will soften Angela Merkel to the point that she will accept reforms like euro bonds, a banking union or a direct recapitalisation of the region’s banks by the European Stability Mechanism, the euro zone’s bailout fund. But the more the gang of three insists, the more Germany is digging in its heels. On some of the issues it can even rely on the support of the European Central Bank. Ganging up on Germany is not only inefficient: it could backfire if it makes it impossible for euro leaders to come up with some common vision at their summit at the end of the month.

The euro zone used to be simple. It only took Germany and France to agree on the main issues. Then the two of them went to work on the others to clinch the ultimate deals and compromises. The situation has changed. Since the bailouts began, the split between the north and the south has widened. France has a foot in both camps. It is the second-largest contributor to the bailouts, but also has a fragile economy which might have to rely on German benevolence at some point in time.

François Hollande started his presidency in a conciliatory mode with Merkel, after having campaigned against German-style austerity. Now he seems to want to lead the clan asking for serious German concessions. He invited Merkel’s opposition, the Social Democrats (SPD), for talks at the Elysée. He is clearly aiming at some kind of alliance with Italy’s Mario Monti, whom he is visiting on Thursday in Rome, and is on the same page as Spain’s Mariano Rajoy.

The aim is to get Germany to agree to what it has always refused: immediately launch reforms that would imply financial backing from Berlin. Merkel understandably wants to make sure that some European fiscal authority keeps national governments in check. Her partners’ insistent drumming will only reinforce her in the conviction that she alone stands in the way of irresponsibility.

By Pierre Briancon and Fiona Maharg-Bravo

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

To be successful, Spain’s bank bailout should be a takeover. Euro zone governments have so far been vague about the exact “conditionality” they will attach to recapitalising the country’s lenders. Nonetheless, that vagueness is indicative of the direction they’re heading. There’s the classic restructuring of the banking sector, which will be supervised by the European Commission’s competition authorities. Then there is what the euro zone governments called “horizontal structural reforms” which could signal the end of Spain’s politicised banking system. Madrid may resist on sovereignty grounds. But there’s little it can do.

EU authorities have no template for taking over a country’s banking sector. But the International Monetary Fund’s report on Spanish banks, released on the eve of the bailout, offered some suggestions that cut to the heart of the current system. In particular, the IMF recommends more direct regulatory powers for the Bank of Spain, which currently relies on the government for its authority. The IMF also called for the introduction of a bank resolution scheme that would impose losses on both shareholders and bondholders, which have largely escaped any pain so far. However, any new rules are unlikely to be in place in time to reduce the current bailout bill.

The most difficult reform will be to end the decades-long tradition of cronyism at the former savings banks, whose overhaul is still a work in progress. That will mean Spain’s bailout fund, the FROB, replacing existing management teams, and possibly taking controlling equity stakes. Arguably it will be easier for the European Commission, the European Central Bank and the IMF to push for such reforms, allowing the Spanish government to employ the “euro zone made me do it” excuse.

Ideally, the troika should keep the leverage of disbursing its funds in tranches, instead of paying out the whole amount in one go. There may be some tough conversations ahead with the Spanish government, when it becomes clear that some sovereignty has to be surrendered. But Madrid’s partners should make it clear that they aren’t prepared to spend up to 100 billion euros in order for Spain’s banks to continue with the same men and practices.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The case for the euro zone to step in and help recapitalise Spanish banks should have been a no-brainer. Spain is in a bind of its own making, but the challenge of turning its economy around has been magnified by the crisis. As for the euro zone, it has the instruments and the money to help Madrid recapitalise the country’s banks, leaving the government to tend to its own business.

This weekend’s possible mini-bailout could and should have been a simple, straightforward, shock-and-awe intervention weeks ago. Instead, time was wasted because of Spanish Prime Minister Mariano Rajoy’s misplaced pride, and because the dysfunctional euro family has been unable to put its own bailout fund to use.

Rajoy says he doesn’t know how much money the banks need, so there’s no point in tapping the bailout fund. But the specific number isn’t the central issue for now. Spanish banks may need anything between 40 billion and 100 billion euros. What matters is that the European Financial Stability Facility steps in, in principle. And if the first round isn’t enough, there will always be time to add more later.

The sticking point has been for too long whether the EFSF or its successor, the European Stability Mechanism, should be allowed to rescue banks directly, or indirectly through governments. Rajoy has been adamant that Spain doesn’t need a full bailout a-la-Greece, and he may be right. But obsessing about the stigma of aid has done nothing to calm markets.

Germany’s symmetric obsession – conditionality – has also been a major impediment to a deal. Rajoy wasn’t ready to accept humiliating conditions forced upon his government, which is already doing a lot to get out of the morass.

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The European Central Bank is waiting. It is waiting for further deterioration in the stagnant euro zone economy – with its 10 percent unemployment rate – before it lowers its key interest rate. It is waiting for euro zone governments to do something substantial about Greece and Spain. And it is waiting for a long-term plan for monetary and banking union before it offers the short-term measures needed to keep contagious fear from devastating the region. The ECB has long taken the euro zone governments to task – and rightly so – for their incapacity. Now it looks stuck in the same morass.

After three years of crisis, the ECB’s exasperation at being the only vaguely efficient institution in the euro zone is understandable. Time and again, it has forced governments to do what it thought was needed before agreeing to step in.

Now it doesn’t seem to know what to do in the face of the Greek political impasse and the Spanish banking mess. Spain, like Portugal or Ireland before it, refuses to request a bailout – even though it would be no more than a “bailout light”, a recapitalisation of the country’s banks. The euro zone governments are impotent – even though their European Financial Stability Facility could be put to use right away.

The best way to do this would be to allow the EFSF or its successor, the European Stability Mechanism, to help the Spanish banks directly. Most governments favour this solution. Central bankers do too, even though the ECB doesn’t explicitly say so. But Germany opposes it – or rather, wants other concessions before it agrees.

The ECB could once again push governments to do the necessary, even at the price of ignoring diplomatic niceties. But it is restrained by Germany’s opposition. Rather than act, it will wait until the euro zone’s governments reach a consensus on a grand plan. That won’t happen, if it ever does, before the end of June, at best. What happens in the meantime? Markets get more fearful, more demanding, and everyone keeps bluffing. Even though no one’s hand is stronger than a pair of 2s.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For once euro zone leaders did the right thing, the very thing they have been unable to do throughout the euro crisis: shut up. Their nine-line communiqué to say nothing on the subject was the only sensible option after their informal dinner Wednesday night. The other alternatives would only have made things worse. And whatever the pundits’ or markets’ expectations may be, it’s better for the euro summiteers to keep mum than to pretend having the answer which only the Greeks can provide.

Greece’s euro partners would like the second Parliamentary election, to be held on June 17, to become a de facto referendum on membership of the single currency. But they can’t insist too much without appearing to interfere in the Greek electoral process. The zone’s leaders are most probably ready to offer some concessions on the bailout programme to show that the euro is not just about pain and punishment. But they can’t reveal their hands before the election, because the radical parties rejecting austerity might feel emboldened and demand more concessions ahead of the vote.

Meanwhile, euro zone leaders and the European Central Bank must brace for the worst-case scenario of a Greek chaotic euro exit. But they can’t publicly admit that they’re planning for it, because it could amount to a self-fulfilling prophecy, and because markets turn south every time a European official simply mentions the possibility of Greece leaving the monetary union.

So what’s to do? Keep calm and carry on planning for the day after the Greek election – which, as it happens, will be the first day of the G20 leaders’ summit in Mexico. That may be difficult in a 17-country glass house and a 24-hour news cycle. But euro zone leaders must prepare plans for either dropping Greece, or supporting it with a plan to boost growth in an aggressive way. Strains in Spain, or Italy, might force them to the podium. But silence, in the next three weeks, will be golden.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

With growth on the menu and Greece on their mind, François Hollande and Angela Merkel have reasons to dispense with the usual niceties for their first meeting. The French president chose to fly to Berlin to meet the German chancellor on the very day of his inauguration – and not simply because he wants to smooth over some of the rough edges of the electoral campaign. His trip is also an acknowledgment that there is a fire in the euro house: neither France nor Germany can afford to waste any time before trying to put it out.

The best thing the two leaders could say about Greece after their meeting is nothing. Merkel, because any utterance will only add fuel to the Hellenic conflagration. Hollande, because at this stage he could only mouth platitudes on the topic. But public silence should be matched by intense private conversation.

Both leaders are challenged by the new crisis. Hollande must go beyond the campaign rhetoric about the need for growth-friendly policies in Europe: the initiatives he has in mind are irrelevant to the immediate risk of a messy Greek exit from the euro zone. For Merkel, the challenge is to avoid making her rigid stance on Greek austerity the main obstacle to the formation of a new government in Athens.

A productive conversation would lead to an either/or agenda. Either the Greeks can at last form a government able to negotiate with its creditors – in that case France and Germany should design the outlines of a face-saving deal – or an agreement proves impossible and Greece finds itself outside the euro. Then a contingency plan must be ready.

A deal will be difficult to achieve if it creates a precedent for unhappy governments willing to renege on the commitments made in exchange for aid. But Merkel’s Social Democrat opponents, emboldened by their recent electoral victories, are asking for some growth-friendly policies themselves. So the chancellor might be willing to make some concessions.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Bundesbank keeps raising concerns about a possible surge of inflation in the euro zone. But the fears are premature at best. The European Central Bank hasn’t failed on that front. While the current 2.7 percent inflation rate is above the ECB’s official goal of “below but close to 2 percent”, it expects to be back on target in early 2013. The question is whether sticking to that stubborn 2 percent goal makes sense as recession threatens.

The ECB is keeping its key interest rate at 1 percent, much higher than the near-zero levels in the United States and UK. The economies’ near-term prospects don’t justify the euro premium. The euro zone’s gross domestic product will shrink by 0.3 percent this year, according to the latest International Monetary Fund forecast, compared to 2.1 percent growth in the United States and 0.8 percent in the UK.

The monetary purists at the Bundesbank fear that lower euro rates – or even too many months at the current level – will fuel inflation in Germany. It’s possible, even though in the year ended in March, prices rose by 0.4 percentage points less in Germany than in the euro zone as a whole. Faster growth in Europe’s largest economy could reverse the gap this year, especially if German workers succeed in their demands for higher pay after a decade of strict wage discipline.

Yet higher German inflation shouldn’t be feared, but hoped for. It would make looser monetary policy more effective where help is most needed. Prices are rising slower than the average in troubled euro countries like Greece, Spain or Ireland. Higher inflation in Germany would help them regain some competitiveness. And it would help rebalance the euro zone economy, after a decade when German exporters gained market share throughout the region.

Mario Draghi, the ECB’s president, is unlikely to say so, but in an ideal world he would: inflation in the euro zone is not a threat. And more of it in Germany could be good for Europe.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own

The French have chosen a socialist president without any experience of executive power and little taste or knowledge of international matters. When one considers where the certified “experienced” leaders have led Europe in the last three years, this shouldn’t be much of a worry. But if newly-elected François Hollande thinks he can plan for a few months of learning on the job, the situation in Greece is a pressing reminder that he should cut the training period short. 

Hollande campaigned on a programme of moderate reform and little pain, promising to raise taxes for any extra spending he advocates to reduce France’s growing inequalities. His apparent determination to ignore the French economy’s most pressing problem – its lack of competitiveness – is only balanced by the centrist, moderate views he harbours on most things. This has led some to hope that reason should ultimately guide him if and when a serious crisis strikes. 

The new French president’s first foreign trip as president-elect will be Germany to visit Angela Merkel. This shows at least that he has the right sense of priorities. The new French leader called during his campaign for more growth and less austerity. As long as he sticks to his promise of putting France’s finance back in order, this shouldn’t be much of a problem with Berlin. The German chancellor, politically weakened by her own electoral setbacks, should accommodate him. Her foreign minister is already talking about working on a growth pact with France – though what he means by that remains fuzzy. 

François Hollande has become the symbol of a new phase in the euro crisis created as governments start talking about the future – growth – instead of solely focusing on the past – when austerity was deemed as the only solution. But his leadership and political acumen will be tested before he sets out his detailed ideas for France. Hollande, as head of the second-largest euro zone lender country, will have to explain what if anything he suggests for Greece – and for other troubled euro members. How does he propose to boost growth in cash-strapped economies? And what does he suggest doing in the short run? That’s when he will discover that his new job is not just about the French.

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

BNP Paribas and Société Générale are nearing the end of their crash diets. At least, that’s what the French top banking duo hope after a first quarter in which they shrank their balance sheets following last year’s euro zone-induced funding squeeze.

BNP, France’s largest bank, says it has completed 80 percent of its asset disposal programme, which will be over by the summer. In the rush to deleverage and refocus on euro-denominated funding, both banks have offloaded a mixture of legacy assets, loans and corporate and sovereign bonds. Some buyers have even paid cash, as in the sale of BNP’s majority holding in real-estate group Klepierre, which allowed the bank to book a handy 1.5 billion euro capital gain.

Both banks can still rely on strong retail arms that show no signs of suffering from the euro zone’s economic woes – at least not yet. SocGen is arguably less vulnerable to a euro-wide recession if it eventually hits, as the lender is less exposed to the zone than its larger rival. Strip out the Klepierre sale, and both banks moved in sync during the quarter, with revenue down 6 percent at BNP and 5 percent at SocGen. Net profit at both banks fell by roughly 20 percent.

BNP, however, has a head start when strengthening its capital buffers. The bank says it will have reached a core Tier 1 capital ratio of 9 percent – assuming the full implementation of new Basel III rules – by January 2013. Under its current assumptions, BNP will get there this June. SocGen reckons its core Tier 1 ratio will be in the range of 9 percent to 9.5 percent at the end of next year.

Their association with the euro zone will continue to afflict BNP and SocGen for some time. And they may seriously suffer if France finds itself at the centre of the storm after its presidential election. Both banks trade at a fraction of their book value. But on that metric SocGen trades at a 34 percent discount to BNP. There’s no obvious reason for the discrepancy, save for the contrast between BNP’s traditional, robust model and SocGen’s sexier but more troubled past. Even for slimmed-down banks, reputation still matters.