EU leaders recently held another summit as Europe continues to grapple with the crisis facing its economy and the single currency. Initially portrayed as a significant step forwards, subsequent events demonstrate that despite some important developments, the agreements reached at the summit are far from being a panacea to the ongoing crisis.
The issues addressed at the summit included the following:
- Direct recapitalisation for Spain and Ireland – this will allow the European Stability Mechanism (“ESM”) (the Eurozone’s permanent rescue fund) to recapitalize banks directly without the need to go through national governments (so that financial support for banks does not entail an increase in national debt). Similar measures may also be made available to Ireland;
- Eurozone’s “seniority status” relinquished – the Eurozone will relinquish seniority status with respect to the bailout, via the ESM, of the Spanish Banks (although this will not apply to other loans or bond purchases);
- Italy – in order to help reduce borrowing costs for European governments there will be greater flexibility for EU bail-out funds to buy bonds without countries being subjected to a full programme of austerity measures by the ‘Troika’ (expected to make it easier for the likes of Italy to enlist the ESM to buy its bonds and in turn reduce its sovereign borrowing costs); and
- ECB to act as the central bank supervisor – the European Commission aims to draw up plans to make the ECB the supervisor for Eurozone banks by the end of 2012. This will give the ECB ultimate power to oversee Euro area banks.
A key aspect of this deal is the proposed new system of European banking supervision via the ECB. This is seen as marking the first step towards a full banking union.
However, various concerns have been raised by commentators over this proposition - the biggest being the preservation of a single market. Further issues include the uncertainty surrounding the proposal such as the exact nature of the ECB’s powers and which banks it will supervise. The French have aired their wishes that all banks in the Eurozone should be covered, but it is likely that other nations will be more reluctant to relinquish power, especially Germany which would want to maintain control of its politically powerful regional savings banks and limit supervision to the larger cross-border banks. Issues also surround the appointment of a resolution authority which would have the power to intervene and wind up a failing bank (even in circumstances where it was against the wishes of the national government). Another critical issue which could also prove politically controversial is the question of a Europe wide deposit guarantee scheme.
These developments also raise some difficult questions for the UK: arguably, the greater the push for closer integration between the European countries, the more likely it is to result in the UK being pushed to the fringes. However, it is not only the UK that has cause for concern. Germany in particular has concerns about the provision of bailout funds to banks directly rather than through sovereign governments and its constitutional court is considering a number of challenges raised in relation to the new European bailout fund (the ESM). The new proposals will limit the scope to shape the countries’ economies and with the relinquishing of control comes a greater level of risk. Germany’s Angela Merkel returned to Germany amid criticism for backing new measures to prop up the “weaker Eurozone economies” but insisted that taxpayers’ money will not be committed in the Eurozone without strict conditions. Discord has also been heard in countries such as the Netherlands and Finland, both of which have indicated that they will demand extra collateral in return for loans. In the circumstances, it is difficult to see how bolder steps such as a partial mutualisation of European debt (for example, via the issue of so-called Eurobonds) can be achieved in the near future.
At the end of last week, the Eurozone agreed to provide a Euro 100 billion loan to Spain to be channelled, at this stage, through the Spanish government. However, in part due to the realisation of the political hurdles which must be cleared if Europe’s crisis is to be resolved and continued concern about the level of financial assistance which will eventually be required by Spain (and possibly Italy), European stock markets fell and Spain’s borrowing costs rose, with 10 year bond yields exceeding 7%, a rate which is widely seen as unaffordable.
While the recent summit represents an interesting development – with EU countries apparently increasingly accepting the need for greater political integration both in terms of fiscal and banking policy – it remains clear that this crisis has a long way to run.