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2012-07-10 08:41:35
The latest European summit made more progress than usual but still not enough
Jul 7th 2012 | from the print edition
WAS Europe s 19th crisis summit, held in Brussels on June 28th and 29th, a
game-changer? Judging by the euphoria in financial markets and among many
commentators, the answer seems to be yes. Yields on Italian and Spanish bonds
fell sharply as investors decided that Europe s political leaders had committed
themselves to the creation of a banking union and to allowing troubled
countries easier access to euro-zone rescue funds. The prime ministers of Italy
and Spain, Mario Monti and Mariano Rajoy, and the French president, Fran ois
Hollande, were widely hailed for scoring a victory over Germany s chancellor,
Angela Merkel. She, in turn, was excoriated by many at home for giving in to
blackmail.
As so often, the summit had been billed as a make-or-break affair, in which
Europe s political leaders had to lay out their vision for economic and
political integration to save their single currency. Is the euphoria about to
fizzle, as in the past?
The summit gave reasons for guarded optimism. Europe s politicians have said
they will create a Europe-wide bank supervisor (involving the European Central
Bank) before the end of the year. This is only a pledge, but if the history of
European policymaking is a guide, the euro zone will quarrel over the details
of a banking supervisor only to agree to one eventually. Second, by accepting
that bail-out funds can go straight to banks, Mrs Merkel has made a big shift
from her insistence that help could go only to governments, with tough
conditions attached. The underlying German logic that shared financial
liability must imply shared oversight remains the same. But by countenancing
jointly financed bank recapitalisation, Mrs Merkel has accepted a broader
notion of risk-sharing. This is still a long way from the partial debt
mutualisation that the euro zone needs, but it marks a step forward from
Germany s exclusive obsession with fiscal austerity.
However, there are caveats. Europe s politicians did not commit themselves to a
banking union. There was no agreement to euro-wide deposit insurance or to a
common bank-resolution scheme. And although the summit agreed that euro-zone
rescue funds could be injected directly into banks, this depends on the single
supervisor being in place first.
The supposed loosening of the strings attached to help for peripheral economies
was also limited. The much-ballyhooed agreement that rescue funds could buy
embattled countries bonds without onerous extra conditions was just a
political promise to do something already allowed. The only concrete new
commitments were that the promised aid of up to 100 billion ($125 billion) for
Spain to recapitalise its banks would no longer be senior to other debt, and
that Ireland could expect the burden of its bank bail-outs to be eased.
A set of limited and contingent promises is much better than nothing, but it
hardly adds up to a sturdy new foundation for the euro s future. A lot could
still go wrong. In a system that requires unanimity, grumbling from Finland and
the Netherlands is a reminder that even if the limited deal at the summit
holds, further steps will be hard. Legal challenges have already been laid
before Germany s constitutional court. Mrs Merkel s coalition partners and even
some in her own party are threatening to be obstructive. And existing problems
have not gone away: most obviously, hard decisions still have to be made about
whether to give more help to Greece, which barely featured in the summit s
discussions.
The summer-holiday-saving summit?
It is therefore a brave soul who would call this summit a turning-point for the
euro. Given that agreeing on a banking authority will take several months,
think how remote are the more fundamental constitutional changes needed to back
a banking union and Eurobonds. The outlook for the European and world economy
is darkening. Recession will undermine normal politics and create conditions
for markets to take fright (see article). The euro zone got through this
summit, but it is going to have to prove its resolve over and over again.
from the print edition | Leaders