Crisis Negotiation: The European Financial Crisis

Establish ground rules and policies before a crisis hits

By — on / International Negotiation

crisis negotiation scenarios

The global financial crisis of the late 2000s led to high-stakes international negotiations across Europe to save the euro-backed banking system.

Back in June 2012, as the European debt crisis emerged,  Spain announced that it soon would be unable to borrow in the bond market without assistance from other European Union nations. Emilio Botin, the chairman of Banco Santander, said about 40 billion euros, or $50 billion, in European funds, would be needed to repair Spain’s banking sector, according to Bloomberg News.

Planning for a crisis, particularly in international negotiations, can help negotiators develop strategies before a crisis emerges. Here are some of the negotiation strategies European central bank leaders use during the financial crisis to help prevent a market collapse.

Crisis Negotiation  and Crisis Management: “Too Big to Fail”

Spain’s announcement launched unofficial negotiations over a deal to rescue the nation’s banks. As the euro zone’s fourth-largest economy, Spain is considered too big to fail “and possibly too big to steamroll, changing the balance of power in negotiations over a bailout,” wrote Nicholas Kulish and Raphael Minder in the Times on June 6, 2012. By demanding emergency aid for its banks, Spain tried to avoid the austerity measures and deep recessions faced by smaller nations such as Greece, Portugal, and Ireland.

Spain’s negotiation demands were bolstered by the fact that it did not run large budget deficits before the crisis. The nation has a lower level of debt as a percentage of gross domestic product than even Germany, the European model of fiscal restraint. As “calls for growth have begun to outweigh German insistence on austerity,” wrote Kulish and Minder, Spain planned to make a convincing argument that European aid to its banks should not be accompanied by a loss of governmental decision-making power over the Spanish economy and fiscal policies. Spanish leaders were pushing for a deal that only required the country to tighten its oversight over the financial sector without affecting its budget powers. Because Spain already adopted difficult changes and spending cuts, European officials were expected to be much more receptive to a bailout-free of the austerity measures imposed on Greece and other countries.

Madrid’s “trump card in this latest game of euro-zone poker,” says Kulish and Minder, is that a Spanish default and exit from the eurozone would be catastrophic. German negotiators privately pressed the Spaniards to take a bailout, a stance that gives Spain bargaining power, wrote Kulish and Minder: “the chance that it self-destructs implicitly holds the rest of Europe hostage until they agree to terms.”

On June 21, 2012, the Spanish government had to pay punitively high-interest rates to sell its bonds, and it released audit reports indicating that it would need 62 billion euros to support its banking system. The release of the audit is expected to launch the Spanish government’s official negotiations with European leaders over the terms of a multi-billion bank bailout.

Spain’s banking crisis underscores how the European Union lurched from one crisis negotiation scenario to the next.

“The strategy of plugging holes only works for so long,” Friedrich Mostboeck, chief economist and head of research for the Erste Group in Vienna, told the Times. “Eventually, you come to the point where a common euro area requires a common fiscal policy.”

This lack of a unified, guiding fiscal policy gave Spain and other troubled countries negotiating power (see also, Types of Power in Negotiation) at the expense of the broader European economy. The situation illustrates the value of establishing ground rules and policies before a crisis hits to make sure that you are playing on a level, fair field.

Do you have any tips for crisis negotiation scenarios? Leave us a comment.

Related International Negotiation Article: Expect Brinksmanship in the Debt Ceiling Negotiations?

Originally published in 2012.

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One Response to “Crisis Negotiation: The European Financial Crisis”


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