Euro: Merkel gives concessions to Italy and Spain

Germany's Chancellor Angela Merkel arrives to attend an European Union leaders' summit in Brussels, 29 June 2012 Mrs Merkel faced huge pressure to ease eurozone lending rules

Chancellor Angela Merkel has been called Frau Nein - an unbending leader of Germany, unwilling to risk her taxpayers' money in defence of the euro.

In a long Brussels night, she made significant concessions.

The Italians and Spanish - with French backing - forced her into a corner. They warned her that they could no longer continue with the high borrowing costs they were facing.

The Spanish Prime Minister, Mariano Rajoy, spoke of Spanish institutions that could not raise finance. The two countries were not prepared to leave Brussels without measures to reduce their borrowing costs. They threatened to delay agreement on a pact for growth.

The first concession was to allow the eurozone's main bailout fund to help banks directly. The money will no longer have to go via a national government, as the current rules dictate.

This policy has proved hugely damaging. When 100bn euros (£81bn; $126bn) was made available for Spanish banks, it forced up the debts of the Spanish government. Europe's leaders were determined to break the cycle of weak banks undermining governments.

However, only last week in Rome the German chancellor had been quite clear - she could never agree to money going to banks directly, because she could not be certain she would get her money back. Last night her objections melted away.

It was also agreed that the European Stability Mechanism (the zone's permanent bailout fund that will start operating in July) could buy government bonds and drive down a country's borrowing costs.


There has been a significant easing of the terms of such help.

In future, any country that seeks aid whilst trying to follow the EU's budget rules will not have to accept stringent austerity measures like in the case of Greece. There will be no troika overseeing the economy.

A memorandum of understanding will have to be signed, but conditions will not be as harsh as in the past.

Italian Prime Minister Mario Monti says he won't be applying for a bailout under these conditions. We shall see.

What this means, of course, is that the eurozone's bailout fund (backed by taxpayers' money) will be taking a stake in failed banks.

Risk has been increased. German taxpayers have increased their liabilities. In future a bank crash will no longer fall on the shoulders of national treasuries but on the European Stability Mechanism (ESM), a fund to which Germany contributes the most.

What Mrs Merkel will say is that it is a compromise. She has got a single bank supervisor for all eurozone banks, a major step towards a banking union. This will greatly increase the power of the European Central Bank. Chancellor Merkel sees this as an important lever of control over the zone's banks, and she will argue that gives her room to manoeuvre.

In the short term, these measures will ease pressure in the markets. However there is currently only 500bn euros assigned to the ESM. That may get swallowed up quickly and the markets may demand more. It is still unclear just how deep the holes in the eurozone's banks are.

Other countries will immediately seek to take advantage of these terms, particularly those already in a bailout programme.

Ireland described the deal as a "major game-changer". Its prime minister said it would reduce Ireland's debt levels and avoid the need for a second bailout. Greece, too, will be encouraged to seek major concessions in the terms of its bailout.

The eurozone has committed itself to embark on a road towards "genuine" monetary and economic union.

The direction of travel is political union. It may take time, but the countries are committed to a chunk of sovereignty moving to Brussels. The aim, as the European Council President Herman Van Rompuy said, was "to make the euro an irreversible project".

Time has been bought. The agreements reached here in Brussels exceeded expectations.

In the short term, pressure on Spain and Italy will be reduced. The pain in the real economy will continue, however.

Both countries are in recession with unemployment rising. The gap between their economies and Germany is only widening. Both countries claim to have made substantial reforms. They haven't. They have made pledges.

The fundamental problem with the eurozone - that it yoked together such different economies - has not gone away.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 293.

    292, Mexico was not a society of "hunter gatherers" when Polk decided to annex its lands. As for your US-jingoism, I guess you have not heard that the single biggest commonly shared ancestral group in today's US population is German ancestry or that those food-producing farms were owned&worked by Scandinavians,Scots,Irish.Most Americans still identify with Eur & the educated ones actually study it

  • rate this

    Comment number 292.

    289"Has no one heard of Manifest Destiny, President Polk, the Mexican-American..."

    Those who built America weren't going to let hunter gatherers with a population density under1 person per square mile stand in their way.Europeans should be grateful.Food from farms carved out of that land kept your grandparents from starving to death decades ago.It keeps hundreds of millions from starving today

  • rate this

    Comment number 291.

    Reuters quotes graceless headlines from LaLiberation crowing about "Hollande's victory over Merkel."What a joke!But then what is La Liberation but a risible rag?Easily confused with the once-ubiquitous red ensign of the most ruthless,bloodthirsty regime ever to stain the planet with its villainy, predecessor of the 1 still protecting Assad today.Envy makes Hollande's PR tools crow.Won't help them.

  • rate this

    Comment number 290.

    Here's something most of you Brits probably don't know. In colonial times British military commanders sent blankets used by those who died of smallpox to American Indians in hopes of infecting them so that they'd die too. I'm not making this up, it's a fact.

  • rate this

    Comment number 289.

    284, Margaret Howard, you are so right. I stepped away & apparently some breathtaking lies have been proclaimed. Has no one heard of Manifest Destiny, President Polk, the Mexican-American War? "Remember the Alamo?" How did Texas & California (not to mention Oklahoma) become part of the USA? Seems no one studies/teaches US History anymore?Talk to some undocumented farm workers: they are also human.

  • rate this

    Comment number 288.

    Oh yeah, look at all the gold we stole from "dem injuns." And the pyramids we built with their labors.

    And all those slaves....who were mostly brought over by British slave merchants to work on cotton plantations in the British colonies in America. We sure made a lot of money from cotton. Why without cotton where would our present empire be?

    Now let's look at how much Europeans stole.

  • rate this

    Comment number 287.

    So Europe got its wealth from conquest and the US from what it is? Just ask Sitting Bull and Red Cloud, who fought against dispossession at US hands!
    Your views seem always to be biased. Perhaps you should stop just watching Fox TV and read something about history and economics?

  • rate this

    Comment number 286.

    @280 Margaret - UK House of Lords is wholly subordinate to elected Commons; As purely an amending chamber they actually do good work.

    Conversely, the Commission has sole power to propose EU legislation & in my view behaves rather like FIFA - in other words a power unto itself.

  • rate this

    Comment number 285.

    This might relax the situation:

    Have fun; this guy is really nastily cheeky

  • rate this

    Comment number 284.

    279 Homer

    "The US got its wealth and power from what it is, not who it conquered "
    Oh really? Like the land it 'bought' (stole) from the Indians and the slave labour from the Africans that enabled the original wealth from tobacco and cotton to be extablished? Apart from Europe what did the loot from Japan bring you?

    But things run out eventually. Chickens and roost comes to mind.

  • rate this

    Comment number 283.

    281 Margaret Howard

    "Are you saying they handed it over to the nations who had suffered under Hitler?"

    No, definetely not. The nations that suffered most under Hitler had the "fortune" to suffer further under Stalin. I didn't say, things were fair and just. I only stated, Germany was treated really mildly. No second Versailles.

    That's why we are willing to give money- but not unconditionally

  • rate this

    Comment number 282.

    281 I understand why you always remind us so many German top scientists and engineers left for the US after the war. You're angry they didn't go to Britain instead. It wouldn't have mattered. Britain was a broken nation. Wouldn't have known what to do with them, didn't have the money or resources to use them if it had. The world is much better off this way.Be grateful we let you have transistors

  • rate this

    Comment number 281.

    277 ahkar

    "It was little, to make good for what happened from '33 onwards"
    Really? Are you saying they handed it over to the nations who had suffered under Hitler?

    Or did they carry it back home like so many sacks of loot and exploit it to the full to become a super power in the process?

  • rate this

    Comment number 280.

    276 Make

    "The Commission is undemocratic self-interest group"
    No more than many other institutions in the rest of the world.

    As Paddy Ashdown said in this week's Question Time when it was mentioned that over 800 peers sat in the House of Lords: "Just because one of your great great grandmothers slept with King Charles ll shouldn't entitle you to have a seat in the upper house."

  • rate this

    Comment number 279.

    275 It was Europe that got its wealth and power from the military conquest of other nations and people stealing their resources, their labor, their lives.The US got its wealth and power from what it is, not who it conquered.Europe doesn't understand that, can't duplicate it.The EU is like a stone carving of a 747, it can't fly.Europe can never be America, it doesn't have what it takes.It's doomed

  • rate this

    Comment number 278.

    Time for afternoon tea,farewell one & all.

  • rate this

    Comment number 277.

    @ Margaret Howard

    As a German, I must say, of course, the US, but also the UK, the French and the USSR liftet Copy-Rights and Patents off Germany and took advantage of German knowledge, industry and sience after 1945. I add: Rightfully. This was not stealing ( again I risk to be thrown out of my country?^^). It was little, to make good for what happened from '33 onwards, And their is no grudge.

  • rate this

    Comment number 276.

    I can only speak in broad terms as so much of EU project defies logic and integrity; The Commission is undemocratic self-interest group; Germany was at fault ever to let poorer states think Euro a free lunch; Now, with Spain, Italy & France voting themselves more credit again, nothing can save EZ.

  • rate this

    Comment number 275.

    257 David

    "It is outsourcing to slave wage nations, that has brought the decline of western Europe/USA."
    America became a superpower by being on the winning side in WW2, indebting those it helped like Britain and 'confiscating' (stealing) Germany's patents and intellectual heritage, the first orderly exploitation of an entire country's brain power. Now the world has caught up.

  • rate this

    Comment number 274.

    269 "who of us has never been in a French restaurant & come out with an inferiority complex & empty wallet"

    Who of us has ever gotten married without knowing if their spouse to be was a drug addict, alcoholic, had served time in prison, was in debt up to their eyeballs?Why did the EU do that?Because it was bedazzled by the prospect of being a world political & economic power again.Still is.


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