Q&A: Eurozone integration deal
- 29 June 2012
- From the section Europe
European Union leaders went into their June summit signalling that the stakes could not be higher. The eurozone crisis remains perilous - but now they believe they have found a solution.
After all-night talks in Brussels, the leaders agreed on far-reaching plans for tight policy co-ordination in the eurozone. The deal is seen as a big step towards fiscal union and restoring market confidence in the euro.
What has been agreed?
Italy and Spain insisted on immediate measures to ease their dire debt problems. Their borrowing costs on the markets have reached unsustainable levels. Yet they have adopted unpopular austerity measures without needing a bailout, so they feel it is unfair to be frozen out of international markets like Greece.
The lending rules for the eurozone bailout funds will be changed this year, to help Italy, Spain and other "periphery" countries in trouble. The temporary bailout fund - the European Financial Stability Facility - and its permanent successor, the European Stability Mechanism, will be able to recapitalise banks directly. So far they have only been able to lend to governments - and that just adds to the sovereign debt pile.
This eurozone lending will not have "seniority status" - in other words, the bailout funds will not be prioritised over other holders of the banks' debt when the banks repay the loans.
Spain has already been promised eurozone funding of 100bn euros (£80bn; $125bn) for its struggling banks.
The agreement appears to be a concession by Germany, which has insisted on strict limits for eurozone lending. The Maastricht Treaty which launched the euro does not allow governments to be bailed out directly with EU taxpayers' money - yet that is where the rescue funds' money comes from.
So to satisfy the concerns of Germany and some other eurozone countries, there will be a new supervisory body, involving the European Central Bank and a formal contract - a memorandum of understanding - to control the lending.
Will the deal be enough to calm the markets?
Perhaps. Hours after the deal was announced, global markets responded positively.
But previous summits have failed to lower borrowing costs for cash-strapped eurozone governments. The biggest worry is that the leaders' pledges may still not convince market traders and investors who think the eurozone "firewall" is inadequate.
Next month the 500bn-euro European Stability Mechanism will be launched. It will eventually replace the European Financial Stability Facility, which is reckoned to have about 250bn euros left to spend. They are big, but still dwarfed by outstanding debt - they could not cope with a full-blown bailout of Spain or Italy.
Moreover, the European Central Bank cannot act like a "lender of last resort". It has been buying government debt in secondary markets but, unlike the US Federal Reserve, it is uncomfortable with that role, seeing its main job as controlling inflation.
What about Europe's lack of growth?
The leaders approved a 120bn-euro stimulus package. It includes a 10bn-euro boost of capital for the European Investment Bank, reallocation of some unspent EU regional funds, and "project bonds" to fund infrastructure improvements. Little if any of this appears to be new EU money.
Is there a grand plan for the eurozone?
Much attention has focused on "eurobonds" - pooled eurozone debt which would guarantee the debt of the weaker "periphery" countries. Eurobonds are highly controversial, but they are among the ambitious proposals in a roadmap for fiscal union agreed at this summit.
There are also plans for a eurozone treasury with powers to change national budgets and harmonise taxes.
The first "building block" would be a banking union. The European Commission says that could be launched without having to change EU treaties, and the legislation could be ready later this year. It would mean giving the European Central Bank greater supervisory powers, providing eurozone guarantees for bank deposits and having a joint resolution mechanism for insolvent banks.
The UK - a banking powerhouse in the EU - is wary of these plans. It is not clear how they would affect the UK, which is outside the eurozone yet a major player in the EU economy and a cheerleader for the single market. The UK has opted out of the fiscal compact - the new rulebook to tighten budget discipline.
The leaders avoided discussing any mechanism to allow a country to leave the euro. Yet Greece's woes, some argue, highlight a need for that option.
And tensions remain over the relative importance attached to EU solidarity and responsibility.
Germany's Chancellor Angela Merkel demands fiscal responsibility first. Others, including French President Francois Hollande, say solidarity with struggling member states is equally important.
Some elements of a fiscal union are so fundamental that they would require treaty changes and at the very least referendums in some countries. All of that could easily take 10 years.
What about Greece?
The tension has eased a little since a pro-bailout coalition took charge in Greece this month. There will be some renegotiation of the bailout conditions, but it was not on the summit agenda.
Many analysts believe the tough austerity terms imposed on Greece are unrealistic and that default and a Greek exit from the euro have only been postponed.
The "troika" inspectors, representing Greece's international creditors, will be back in Athens soon, to see just how committed the new government is to the existing bailout.
What is the next EU bailout challenge?
Now that the crisis has reached Spain - the eurozone's fourth largest economy - the EU is struggling to dampen fears of contagion. So recapitalising Spanish banks is a priority.
Spain does not yet face the harsh austerity imposed on Greece by its lenders, but its borrowing costs are unsustainable. Yields (interest) on Spanish debt are nearly at 7% and Italy's too have risen above 6%.
Cyprus is the latest needing a bailout, following Greece, the Republic of Ireland, Portugal and Spain. Each requires solutions tailored to its particular needs, but all need new jobs - especially for young people - and a big boost to competitiveness.