Italian Prime Minister Mario Monti (L) talks with the German Chancellor Angela Merkel (R) during a family photo session during a meeting of European Union leaders for the EU summit at EU's headquarters in Brussels, capital of Belgium, on June 28, 2012
When it comes to confronting the crisis threatening the euro’s very existence, nothing ever seems to come easy for European Union leaders—even a mutually sought agreement. That was demonstrated Friday at the E.U. summit in Brussels, where it took all-night haggling to approve growth stimulus measures that Italy and Spain had blocked until they obtained a softening of rules on bailouts that they’re likely to eventually seek. Only in the madness of the euro crisis can taking yourself hostage become an effective bargaining tool.
Yet, despite what were described as tense and grinding negotiations, decisions announced early Friday morning appear to represent important steps towards the survival of the embattled euro zone—and in both the short- and long-term context of the crisis. “(We took) a very ambitious decision that shows once again the commitment of the member states,” European Commission President Jose Manuel Barroso told reporters. “The irreversibility of the euro… will be recognized by all.”
At least once they wake up in the afternoon. Before the sleep-deprived leaders of the 17-member euro group broke their huddle at around 5 a.m. Friday, they adopted three significant concrete measures to confront the major factors in the crisis. The first involves allowing E.U. bailout funds to be paid directly to swamped euro-zone banks, rather than funneled through national governments. The old structure—designed to hold governments accountable for E.U. taxpayer rescue money—had the consequence of increasing the already crushing debt loads recipients were struggling to simultaneously finance and reduce. The change had been a demand Spanish Prime Minister Mariano Rajoy called vital in light of Spain’s pending $125 billion bank bailout request.
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“It’s vital we break the vicious circle in which financially troubled banks get E.U. rescue aid from national governments whose debt level increases in the process,” said an advisor to French President François Hollande before the summit, explaining the logic behind the switch to direct aid. “Swamped banks hold enormous stores of their government’s debt. Those bonds start looking like even riskier investments to markets when the government has to take on additional debt to hand banks E.U. funding. The negative impact on increased sovereign debt undermines the intended benefit to banks, so everyone loses.”
The second summit agreement was to deploy $149 billion in existing emergency reserves as economic growth stimulus. That will soon start funding infrastructure projects, business development in strategic areas such as sustainable energy and youth employment programs.
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The third decision—taken at the insistence of Italian premier Mario Monti—will create more flexible conditions under which struggling euro-zone members can appeal for funding to counter the market forces driving up their borrowing costs. That means countries like Italy and Spain—which have recently seen interest rates on new bond issues rise to untenably high levels despite having undertaken considerable austerity measures and reforms—can turn to E.U. institutions for aid without fearing the same harsh cost-cutting requirements imposed earlier in the crisis.
“We are opening the possibilities for countries that are well-behaving to make use of financial stability instruments… in order to reassure markets and get again some stability around some of the sovereign bonds of our member states,” E.U. President Herman Van Rompuy declared.
Viewed collectively, these moves appear to signal progress by E.U. leaders who had begun challenging the strict fiscal discipline championed by German Chancellor Angela Merkel. Hollande initiated the anti-austerity drive during his campaign for the French presidency earlier this year, with arguments that excessive spending cuts by national governments to lower debt levels had strangled already shrinking growth across Europe. While acknowledging that deficit and debt problems must be remedied, the Socialist Hollande—who since his election in May has formed a de facto alliance with like-minded Monti and Rajoy—argues the short-term focus must be on restoring economic growth, reducing unemployment and nurturing revenue-generating activities that will allow states to finance and reduce their debt loads. The $149 billion euro-zone stimulus funds he pushed for reflected that belief.
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“François Hollande was described as totally isolated when he defended these pragmatic and effective positions on stimulus and flexibility to overcome short-term threats and open the road to long-term solutions,” said the Elysée official. “A majority of euro-zone leaders—including some at first hostile to his view—are now calling for the same policies.”
Yet, despite these moves, it would be unwise to view the summit as the worm turning against the long-defiant Merkel. The measures agreed to in Brussels suggest that Merkel may be advancing her long-term objectives by bending a bit on details that won’t cost her much now that most of her austerity prescriptions are in place.
For example, all the funds involved in the new plans had already been established under previous E.U. responses to the crisis, and are now largely being activated or re-directed. Similarly, the concession that Monti and Rajoy won on nominally lenient aid conditions will require proof that applicants are already playing by the existing crisis-resolution rules Merkel had orchestrated. That means any signs of slippage will result in loan rejection or additional tightening of the screws.
But perhaps most importantly, the funding changes under the summit agreement won’t kick in until centralized European overview structures are in place later this year. That monitoring capacity is part of what now appears to be irreversible movement towards budgetary and fiscal integration, and a banking union across the euro zone. Indeed, the currency crisis has become so acute that most members now seem resigned to shifting a significant degree of regulation and decision-making power from national capitals to Brussels. E.U. officials will now prepare what they laid out earlier in the week as a virtual integration “road map” for the next summit in October.
“Will the French parliament’s final authority and control over budgets be sacrificed? No, because that’s parliament’s legal responsibility under the constitution,” says the Hollande adviser, who acknowledges the historical reluctance of otherwise pro-European France to surrender any authority to Brussels. “But the common organization and structure attentive to both short- and long-term objectives, and which balances social and human concerns with fiscal restraints now being proposed goes in the same general direction as French philosophy.”
That’s a major change that no declaration or document coming out of Brussels on Friday will stipulate—and it may not be enough to save members like Greece from dropping out of the group. But it does suggest that progress and convergence is possible among euro members—even if it never comes easily.