As EU leaders emerged from their marathon negotiations on resolving their nations’ multi-faceted financial crisis, all proclaimed victory while speaking in ways designed to be well-received in their own countries.
For France’s President Nicolas Sarkozy, the summit “allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the eurozone.”
For Germany’s Chancellor Angela Merkel, “we lived up to expectations…and agreed [on] long- term reforms designed to improve European institutions and cooperation within the eurozone.”
For Greece’s Prime Minister George Papandreou, the debt-solving deal marked “a new day for Europe and for Greece.”
What all these and the other 24 leaders at the EU summit seemed to share was a sense that Europe finally had achieved a coherent, credible breakthrough on the interlocking problems of sovereign debt, banks’ solvency and political timidity.
However, what is likely to be the most enduring success of the summit was its commitment to ceding elements of national sovereignty in the economic and fiscal governance of the euro area to European Union authorities. In addition to strengthening crisis management tools, the agreement reinforces coordination, surveillance and discipline by Brussels.
Crucially, the communiqué said, eurozone states’ “national budgets should be based on independent growth forecasts.” In addition, it said that the adoption of any major fiscal or economic reform plans with potential spillover effects must be preceded by consultation with the European Commission and euro area member states.
Such measures – of surveillance and management, as the communiqué calls them – have been called for by many policy-makers and analysts as a step toward closer fiscal integration and centralized authority over the fiscal policies of the countries using the single currency.
Measured by this major relinquishment of national sovereignty in the fiscal area, the summit can be credited with “turning a crisis into an opportunity” for the eurozone and the other EU governments in moving toward more integrated economic governance.
The leaders’ package of steps to solve the crisis, laid out in a 14-page final communiqué, is a package of mutually reinforcing measures to restore the eurozone countries’ credibility. It aims at four key goals:
1) helping Greece surmount its debt crisis by a 50 percent write-off on its loans and bolstering other indebted countries, notably Italy and Spain, against any fallout from the Greek outcome;
2) protecting the European banking system by raising the threshold of how much capital they have to hold against their liabilities;
3) trebling the “firepower” of the EU’s rescue fund, the European Financial Stability Fund, to one trillion euros to guarantee the bonds of other fragile economies in the eurozone;
4) putting teeth into measures enabling Brussels to maintain budget discipline and fiscal transparency in the national economies of the 17 countries using the euro.
The summit’s success means that the EU’s leaders can now proceed, with heads held higher, to the G-20 summit of world economies in France in two weeks. Now that the EU has produced an action plan for stemming the euro crisis over time, the leaders can turn to other global players at the G-20 – starting with China – for financial help in implementing the eurozone’s tool-kit for fighting rises in interest rates on government bonds.
At the summit, the EU leaders will also be looking for more help from other outside players, notably the International Monetary Fund. Its Managing Director Christine Lagarde has been widely praised by European officials – including Germany’s Merkel -- for her help in setting the stage for the EU summit deal, which has cited IMF “rules for compliance” as a template for tougher EU economic governance.
Now EU leaders hope for IMF help on the tricky issue of giving more “leverage” to the EFSF rescue facility while at the same time respecting German opposition to seeing the EFSF become an open-ended lender that would have to be ultimately guaranteed by taxpayers. To cope with this objection, the EFSF will partially “guarantee” investors who buy eurozone government bonds.
In addition, the EFSF is also seeking more financing to reassure investors by getting funds from the IMF to use in preventing any market panic in the future. This support might come in the form of a new “special-purpose vehicle” – a device that would avoid any shake-up in the current voting powers inside the IMF of the sort that has met powerful objections in the U.S. Congress.
At the G-20, the EU will also be looking for support on its long-term goal: stimulating renewed economic growth and job creation. That could only be addressed in detail once the EU had a plan for fiscal stabilization, but European leaders agree that growth, not just austerity, is essential for sustainable economic balance in Europe. The summit conclusions call for structural reforms to expand markets and generate business opportunities.
The immediate key to fiscal stability was the Greek debt, which will now be gradually cut to a manageable level – if Athens can resist populist pressure and stay on course with its austerity measures and fiscal reforms.
In practice, the reduction in Greece’s debt still depends on having almost all current bondholders participating in the plan, and the actual bond-swap – which will give the existing bondholders bonds worth half as much but rated Triple-A – will also have to be negotiated by January. The deal will include “cash enhancements” to sweeten the terms of an accord that seeks to avoid being labeled a “default” but is designed to reduce the country’s debt load to a more manageable level (120 per cent of gross national product by 2020).
Even with many potentially devilish details to be settled, the outcome, with its coherence and commitment by all sides, was greeted with enthusiasm by world financial markets. Caution and even skepticism was also voiced by analysts who embroidered on a point made by European Commission President Jose Manuel Barroso to the effect that the success of this good blueprint would now “depend on implementation.”
Indeed so. Often in the past, emergency EU meetings have produced ringing declarations that were never followed up with practical action. What seems to have changed this time is that EU leaders – at the top of governments, the European Commission, the eurogroup that manages the eurozone, the European Central Bank – seem to have learned from their mistakes in past efforts to gloss over the problems and pressures that have built up during the two-year long crisis.
This time -- in contrast to any attempt to rush to an accord that only papered over the problem -- eurozone governments, following the lead of Merkel and Sarkozy, worked energetically to lay the groundwork for a substantive agreement that finally brings together the elements of an overall solution that could deliver results now and in the long run.
While headlines reported on the conflicting national priorities and frictions between governments and private-sector investors, negotiators worked hard behind the scenes to develop remedies that seemed realistic to global market participants and that European leaders felt would be acceptable to their parliaments.
For example, in a pivotal piece of the eurozone’s rescue plan, Merkel and Sarkozy persuaded some of the world’s biggest banks to accept a write-down of 50 percent on their Greek government debt. The banks’ main negotiator, Charles Dallara, said after a 4 a.m. phone conversation with Merkel and Sarkozy (who took a break from the 10-hour summit to deal with this issue) that this bond loss was being accepted voluntarily – words designed to avoid triggering a formal default by Athens. But he said the banks' acceptance resulted from "an offer he couldn’t refuse."
In practice, bargaining had been proceeding quietly for weeks between the eurozone governments and the Institute of International Finance (which Dallara heads, representing 450 financial institutions involved in this situation) about the terms of the “haircut” for Greece. In the final phone showdown, which included Luxembourg Prime Minister Jean-Claude Juncker, who heads the eurogroup, the IIF head was told “fiercely…by Merkel, Sarkozy, Juncker that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of total insolvency of Greece,” according to Juncker.
Greece’s bankruptcy would have been ruinous for banks and also for all the eurozone countries. But the German financial establishment was adamant that this cost of Greek profligacy had to be shouldered not only by bailouts funded by European taxpayers but also partly by the private-sector banks. So this episode of brinkmanship was unavoidable for the European leaders.
But they had worked in advance to convince the consortium of bond-holders that their acceptance was a precondition for euro leaders to take two key steps: approve the release of a new tranche of bail-out funds for Greece and agree to the other steps to ring fence the Greek resolution so there is no “contagion” affecting Italy and other euro-dependent countries.
The overall feeling of resolution -- that the EU has laid out a coherent, credible road map to a sustainable position over the coming years -- was perhaps bolstered by better mutual understanding among the parties after so many false starts and disappointed expectations. Indeed, leaders of countries with different national outlooks need time to find intricate compromises that can provide consensus. Taking note of this approach – in a positive way, for once – Goldman Sachs Group Inc. told its clients that “markets now appear to be resigned to tardiness on the part of policymakers [in the eurozone] and grudgingly prepared to accept that resolution will not be achieved in a single step.”
In fact, European leaders seem to have built in a mounting sense of urgency as they use the time and the history of setbacks to help bring along their electorates to accept moves of economic solidarity that would have been unthinkable before crisis.
A high point in this process was the speech delivered by Chancellor Merkel to the German parliament in the afternoon before she travelled to Brussels for the EU summit. With widely-praised passion and rhetorical impact, she told members of Parliament that saving the euro would involve taking risks, but that it would “be irresponsible not to assume the risk.”
Invoking the idea that Europe needs the euro to survive and that Germans need Europe, she went on to say that “the world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II.” Parliamentarians, from all four mainstream parties, voted 503 to 89 to agree to expand and to demand recapitalization of European banks.
Winning German support of this scope depended on the introduction of the new powers of EU leaders to prevent budget and borrowing abuses by eurozone countries. These measures were stressed throughout the summit’s final package, and the day after the summit it was announced that EU monetary affairs commissioner Olli Rehn is to be given extra authority to supervise national fiscal policies.
In announcing the move, which will centralize new economic governance powers in Brussels, Commission President Barroso told the European Parliament that “having a commissioner tasked especially with the euro shows that we want euro governance to happen within a communal framework.” Barroso said that the summit has conferred new powers of “coordination, surveillance and enforcement” in the EU, especially the eurozone. While the details of these new powers are still unclear, officials said the main thrust is for Brussels to have more say in ensuring that member states do not exceed agreements on deficit and debt rules – a role that could be a first step toward a eurozone “finance minister” in the future.
-- European Affairs