It’s another week and another summit for Europe. The latest EU summit will be held in Brussels on Thursday and Friday and once again it is a ‘summit to end all summits’. Last Friday saw the leaders of the four largest Eurozone economies meet in Rome and the outcome was relatively positive:
The countries with the four-largest euro-zone economies agreed on Friday to an economic growth program with a total value of €130 billion ($163 billion). The sum represents 1 percent of the European Union’s gross domestic product, Italian Prime Minister Mario Monti said in Rome after a meeting with German Chancellor Angela Merkel, French President François Hollande and Spanish Prime Minister Mariano Rajoy.
Germany, France, Italy and Spain all agreed that growth measures undertaken so far have not been enough to pull Europe out of a debt crisis that is threatening to unravel the continent’s common currency, the euro. They also agreed that budget discipline alone will not be enough to fuel economic growth and create jobs for the mass of unemployed Europeans.
Chancellor Merkel said the plan was the “message we need.” She also admonished Europe to venture even closer political integration.
Although much of this wasn’t new money I think it is an important step forward because of the acknowledgement that the current ‘austerity only’ plan is failing to fix the Eurozone’s problems. I’ve always thought that ‘austerity alone’ would be a total disaster for Europe and that the idea would eventually be abandoned but that it would probably take the effects of the policy to start effecting one of the largest economies before we saw some reversal of policy. Now that contagion is lapping at Italy’s shores and the latest PMI data suggests that Germany is getting dragged down as well there is a chance we will finally see the beginnings of a co-ordinated response at this week’s summit. Emphasis on ‘beginnings’.
Obviously, given the myriad of previous failed attempts, I could well be premature in my optimism as there is a history of disagreement followed by half-baked resolutions that fall flat on their face. There was little sign in Friday’s post-meeting press conference that Angela Merkel had moved from her position of political/fiscal union first everything else second. There was no discussion of Euro-bonds and she made it very clear that “liabilities and controls go together”, meaning that there will be no shared issuances of any kind until nations have given up their fiscal controls to a central authority. This is all years away.
In the meantime Mario Monti is still pushing for a banking union, including a European supervisor and a deposit guarantee fund. A banking union would certainly relieve the stress on periphery banks as there would be no reason for a Greek or Spanish citizen to shift their deposits to Germany if all banks of significants were seen as ‘Euro’ banks. But in order for a banking union to work it would require a cross-border banking resolution and insurance funding which brings us back, once again, to liabilities and control.
On Wednesday Francois Hollande and Angela Merkel will meet again in an attempt to get the Franco-German game plan worked out before the summit. Obviously there are large differences in their positions so we are unlikely to see anything more than what has already been agreed to. That is , some more detail on the growth pact.
In the meantime the crisis rumbles on…
Greece’s new government has begun asking for changes to its bailout and German finance minister, Wolfgang Schaeuble, has replied:
The most important task facing new prime minister Samaras is to enact the programme agreed upon quickly and without further delay instead of asking how much more others can do for Greece.
The banking problems move to Italy:
Italy’s Banca Monte dei Paschi di Siena is in talks with the Treasury and the Bank of Italy about issuing at least 1 billion euros of government-backed bonds to plug a capital shortfall, two sources close to the matter said on Saturday.
If the Treasury and the Bank of Italy give the go-ahead, Italy’s third biggest lender would become the country’s first bank to resort to state help as the euro zone debt crisis deepens.
“There are very close contacts with the Bank of Italy and the Treasury, although there is no final go-ahead,” one of the sources said.
A second source said: “They are negotiating actively, but the Bank of Italy has to give the final approval.”
Monte dei Paschi has been struggling to fill a 3.3 billion euros capital deficit by end-June to meet tougher requirements set by the European Banking Authority (EBA).
And the Bundesbank is taking swipes at the ECB over Spanish collateral:
As Spanish banks scramble for collateral to use in the refinancing operations that are keeping them afloat, the Frankfurt-based ECB said it will cut the rating thresholds and amend eligibility requirements for some asset-backed securities. While the move will give stressed banks greater access to ECB liquidity, it may also increase the amount of risk on the central bank’s balance sheet.
“We’re critical of this,” Bundesbank spokesman Michael Best said yesterday. In terms of collateral, “we won’t accept what we don’t have to accept,” he said.
Just another week in Europe then.