Eurozone: Now for the hard work

President Sarkozy President Sarkozy said the deal was a 'credible and ambitious response'

Eurozone leaders have delivered more than investors feared they would only last night, and less than they would ideally like to see.

An agreement in principle with banks and private-sector creditors that the Greek government will pay them back only half what they are owed came right at the last moment.

It will also be seen as progress that the 250bn euros left in the kitty of the bailout fund, the European Financial Stability Facility, is to be multiplied four or five times by the use of financial engineering - which President Sarkozy hopes will see the China involved in rescuing highly indebted countries like Italy.

But although markets reacted positively to the news, ideally investors would like to see bailout resources of at least 2 trillion euros and a Greek write-off of 60%.

The other vitally important point is that what we have - on the expansion or "leveraging" of the bailout fund and the reduction of Greek debt - is a statement of what eurozone leaders wish to achieve. All the technical implementation, which will be messy and complicated, is yet to come.

There were two other important developments.

Will the plan work?

Commentators predict the effect of the three-pronged deal.

The Independent's Hamish McRae says so far markets haven't reacted like "headless chickens". He expects only a modest recession in Europe.

Allen Mattich at the Wall Street Journal calls it a "eurofudge" and predicts the plan will be a failure. He sees the imbalances between the eurozone countries as so large that the euro will inevitably fail.

In the Financial Times Sir John Major agrees. He says he kept Britain out of the common currency because of the flaws in the euro - flaws the bailout doesn't get rid of.

First it was confirmed that European banks will have to raise 106.4bn euros of new capital, with Greek banks having to find 30bn euros, Spanish banks 26bn euros, Italian ones 15bn euros, French 9bn and German 5bn.

But perhaps most significant was eurozone leaders' announcement that there will be tougher controls in future on the budgets of member countries, integration of taxation, and a whole new framework for running the eurozone, including a new leadership structure which will rival the decision-making mechanism of the wider European Union.

The implication is unmissable - that the eurozone will more closely resemble a superstate, with countries on the outside such as the UK unable to influence much of Europe's economic policymaking.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 1.

    Is that a 60% write down of Greek debt after the 21% already implemented. It is said to be voluntary but if not agreed by private investors would that lead to claims in defaulted credits ie a 'credit event' and would the E/zone then fudge the actual write down to avoid this. Just how have they engineered the 1.5 leverage to get to the trillion - appendix to follow please dont ask anymore questions

  • rate this

    Comment number 2.

    So the Tory xenophobes are confounded, and the United States of Europe comes a step closer. Now we stand a chance of competing against the other superpowers: US, China and Russia. Time for the UK to adopt the Euro.

  • rate this

    Comment number 3.

    Can the UK default and save us paying back £500 billion , The problem with Greece is you could wipe out ALL thier debt and in 5 years they would be back to square 1, In the Euro their economy does not work !

  • rate this

    Comment number 4.

    The two table or two tier or two speed Europe is unsustainable in the long run because of the interdependence of economies and that Eurozone countries will have a majority in the EU. Gradually non E/zone countries will join once the crisis is over and the UK will increasingly be isolated. This will force the issue about what relationship UK has with EU in the future. Also what will Turkey do.

  • rate this

    Comment number 5.

    "President Sarkozy hopes will see the China involved", it is rather sad that the President now comes to the realisation that Europe needs to turn to an economic competitor to help it out of its mess.

    I think he's in for a bit of a disappointment. There will be no help from China unless China see's a benefit. Real Politik!


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