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Awash in scandals, Europe will see its crisis deepen

What enrages an austerity-whacked voter most? Stories about politicians with their greasy snouts in the trough, evading taxes and generally misbehaving for their own financial benefit would be a good place to start.

Three euro-zone countries on the front lines of what used to be called the "debt" crisis, now simply the "crisis" to reflect their dire economic conditions, are awash in scandal. Greece's scandal is centred on the so-called Lagarde list of secret bank accounts; Italy's on the near destruction of its third-largest bank; Spain's on a slush fund that allegedly funnelled millions to ruling party politicians.

Each has disgusted voters who are being asked to make sacrifices to keep their countries – and governments – afloat so that their treasuries can flog sovereign bonds at non-fatal interest rates, or, in Greece's case, to keep the bailout funds intact. If the people lose all confidence in their governments, the austerity programs will be doomed along with the ruling politicians. Political chaos and economic chaos are typically handmaidens.

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Until the scandals started to erupt a couple of months ago, the euro crisis was losing its edge, thanks in good part to European Central Bank boss Mario Draghi. In August, he promised to do "whatever it takes" to keep the euro-zone intact, and followed with a commitment to buy bonds of any country in danger of being shut out of the market. Sovereign bond yields in struggling countries duly plummeted.

The people, apparently sensing the communal struggle would eventually reach payback time, stopped burning down the streets.

But austerity efforts took a blow just after Christmas, when George Papaconstantinou, the Greek finance minister at the height of the crisis, played a starring role in the Lagarde list scandal. The list is named after Christine Lagarde, who as French finance minister in 2010 (she's now head of the IMF) distributed to her European counterparts a list with the names of the thousands of Europeans with accounts at HSBC bank's Geneva branch. Many countries collected unpaid taxes from those listed.

The list included 2,000 Greek names, which went to Mr. Papaconstantinou, and then disappeared. It resurfaced last September and it appears no one on the list has been investigated other than the former finance minister himself; he denies accusations that he removed the names of three of his relatives.

The Lagarde list scandal was the equivalent of throwing bleeding hunks of meat to the starving lions on the Greek opposition benches. They are demanding a full investigation into the names on the list. The radical left Syriza party is now running neck-and-neck with the ruling, centre-right New Democracy party. If the ND coalition implodes, and Syriza wins the next election, Greece could enter a fresh political and financial hell. Syriza doesn't like austerity and wants a new debt deal.

Spain's scandal is more serious because it goes to the top of the government, into the office of Prime Minister Mariano Rajoy, leader of the People's Party. The scandal exploded in last January, when the El Pais newspaper published accounts that allegedly revealed the existence of a slush fund, financed by Spanish companies, that funnelled small fortunes to PP members, among them Mr. Rajoy.

The scandal triggered street protests and opposition demands for Mr. Rajoy's resignation. He denied the allegations, though opinion polls show most Spaniards believe the slush-fund reports are true. It is doubtful the government will fall, because the opposition is weak. But it's clear that confidence in the government is evaporating just as it is trying to use brutal austerity to cut deficits and prevent a sovereign bailout (Spain's banks have already taken a bailout).

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Next up is Monte dei Paschi di Siena, Italy's third-biggest lender, the world's oldest bank and a bailout victim. It faces two scandals. The first is for having paid an outrageous amount of money for Antonveneta, a smaller bank, in 2007. Prosecutors are examining whether bribes or kickbacks were involved. The second scandal relates to an unreported derivatives deal apparently designed to hide losses that only succeeded in deepening them. The bank, now under new management, said the dud derivatives will cost it €730-million.

The bank is close to the Democratic Party, led by Pier Luigi Bersani, front-runner in the Feb. 25 election. The scandal has lifted the fortunes of his main opponent, Silvio Berlusconi, the former prime minister who is blamed for turning Italy's dire economic state into a potential euro-busting crisis.

As in Greece and Spain, the Italian scandal has convinced voters and taxpayers that politicians are inept or corrupt or both. Collapsing trust can only deepen a crisis that was supposed to be going away.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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