The leaders of key European Union countries reached agreement on a plan of action on Thursday that they hope will restore market confidence in the Euro. It just might for a while but serious problems still remain.
In short they agreed the broad outline of deals on bailout funds, Eurozone banking union [or at least taking a big step towards it] and on stimulating growth to balance the slavish devotion to austerity.
One of the big questions surrounding the bailout of Spanish banks was which of the European rescue funds – the European Financial Stability Facility [EFSF] or the European Stability Mechanism [ESM] - would be paying [see earlier story]. It is important because one puts private sector creditors further back in the queue for recompense if things go wrong and the other doesn’t.
EU leaders have agreed that, whichever source the loans come from, they won’t gain “seniority status" thus giving some comfort to the private sector that they won’t be disadvantaged by continuing to buy government bonds. Just as importantly, any bailout funds can now be given directly to ailing banks [including the recent €100bn to Spain] rather than having to channel them through governments which just increases national debt.
As pointed out in an earlier article, Ireland's bailout may also now be restructured in this way in the interests of fairness. It is irrelevant to Greece’s earlier loans since both the government and the banking system are bankrupt.
In a clear move towards banking union EU leaders agreed to set up a single supervisory body for Eurozone banks by the end of 2012. This should eliminate the sort of variations in the quality of supervision applied to the sector by national regulators which only 12 months before the collapse of Spanish banking system applied 'stress tests' which declared them solvent and sound.
The European Central Bank [ECB] [based in Germany] will regulate all Eurozone banks ensuring that they all follow the same rules. The quid pro quo for directly recapitalising Eurozone banks through bailout funds will be more power over how they operate.
Bypassing governments and dealing directly with banks effectively breaks the link between sovereigns and their banks reducing the chances of banks bringing down governments.
Responding to the insistence of France and Spain amongst others, EU leaders also agreed to a €120bn package of measures to promote European growth some of it directed to the European Investment Bank (EIB) which will increase the amount it can lend by €60bn. Another €55bn will be used to support small and medium-sized businesses and schemes promoting youth employment.
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All good steps in the right direction and the markets have reacted accordingly. But we have been here before, with the markets at least, and the important thing now is to keep the momentum going. It is essential that the bold gestures, particulalry on central regulation of Eurozone banking, become a reality and, as is so often the case with these summits, the detail of how this will work is conspicuously absent.
And, of course, the UK faces the prospect of being on the outside of any new regulatory banking regime which, given the scandals of the last few days, may not be a good place to be.
The 19th summit to save the Euro has definitely come up with better ideas than the previous 18 but there are still enormous obstacles to overcome. The combined fire power of the EFSF and the ESM is currently €500bn but the combined sovereign debt of Spain and Italy is €2.4tn which puts the newly granted permission to buy sovereign debt via government bonds into stark perspective.
Structural problems still persist in southern Eurozone economies and not even Germany is strong enough to shoulder the burden of supporting those economies until they develop some competetive rigour even if it was so inclined.
The can has been kicked along the road again and certainly a good bit further than previous boots have managed but the Euro as we know it is still doomed.
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