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

Europe in 2014: Ghosts return

History came back to haunt Europe in 2014, not least with Russia's intervention in Ukraine, the BBC's Europe editor Gavin Hewitt writes.

Read full article

More on This Story


This entry is now closed for comments

Jump to comments pagination
  • Comment number 353.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 352.

    #347 MH

    -- I visited Ireland in the 80´s -the tiger still had no teeth.

    Their property bubble was understandable --with small families having 6 kids --and a shortage of adequate and affordable living space.

    When the Friday ´dole´money was paid, the pubs were full -- Saturday less so. The remaining (if any) money was donated to their church charities.

    -- I´m sad for them.

  • rate this

    Comment number 351.

    334 Phfft

    "We do have some strange customs from Morris dancing to cheese rolling."
    So do all European countries - one of the many delights of living in such a varied and interesting continent.
    They evolved naturally over many centuries and didn't have to be invented unlike in more recent societies. Like our many folk songs and carols, they are mostly unforced and quite charming.

  • Comment number 350.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 349.

  • rate this

    Comment number 348.

    Cameron realizes the UK can no longer play an important role within the EU.

    Recent EU developments especially with banking have left the UK isolated. The Libor manipulation is very serious and has swept the rug from under his feet when negotiating for ´City´ exceptions.

    The EU it seems is in no mood for UK ´small talk´ .

    Otherwise he would have been occupied with more important EU issues.

  • rate this

    Comment number 347.

    323 QOT

    "imagine Irelands situation now if it wasn´t in the EU or Eurozone - it only had to depend on the UK."
    We visited Ireland many times before EU days. It was a poverty stricken agrarian society with whole villages deserted and children begging in the streets. The most populous European country in the 19th cent had lost half of its people.

    There is no comparison to today.

  • Comment number 346.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 345.


    ""Let us start to spell out in more detail the parts of our European engagement we want and those that we want to end. "

    -- I somehow get the impression there is writing on the wall -and he is beginning a ´spelling course´ for his pupils ?

  • rate this

    Comment number 344.

    342 Suilerua

    I certainly don`t blame anyone who wants to live in another country where the weather`s better!

    You seem to have some sort of chip on your shoulder, why do you have an inferiority complex??

  • rate this

    Comment number 343.

    315 Homer

    311While the movie"The Patriot"was a fictional account whose main characters are based losely on several actual personages"
    Like the lead character Ben Martin, based on Francis Marion, a militia leader known as the "Swamp Fox" a serial rapist who hunted Red Indians for fun.
    History? Holywood schmaltz you mean. I'm not surprised it appealed to you but oh the company you keep!

  • Comment number 342.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 341.


    This is the Olympics. The general principle is that countries enter teams made up of their best players. It would be disrespectful to all the other potential Olympians to choose the famous guy over the best.

    David Beckham should have a role in the ceremonies as a great ambassador for UK sport. But places in the team aren`t doled out like sweets for the most well-known.

  • rate this

    Comment number 340.

    When the UK was asked to vote in 1972, the question was do you want to join a common market.
    Not do you want to be ruled by Brussels.
    Do you want to obey over a thousand laws a year foisted on you to make business uncompetitive.
    Do you want 3rd of your taxes to go to Southern Europe.
    40 years on, its time we were asked the real questions, but I don't believe our politicians will be that courageous

  • rate this

    Comment number 339.

    Look at the benefits there have been already from the EU.For example every banana sold has exactly the right curvature, not to straight, not too crooked.Big Brother will decide which is the right end of an egg to open.Then he'll make it law of the land so that nobody is accidently hurt by getting it wrong.What more could Europeans ask for than to be treated like prized birds in a guilded cage?

  • rate this

    Comment number 338.

    And what will become of Ireland, Scotland+Wales
    if Britain gives up its national sovereignty to EU?

    Surely a state can't be ruled by
    Two Separate but Equal Federal Govts

    Off topic but I am way shocked Britain didn't take Beckham
    who ironically is one of your major ambassadors
    (or taekwondo guy for that matter)

    Pretty sad

    Everybody loves Beckham
    except Britain I guess

  • rate this

    Comment number 337.

    332"I don't believe the actual people of Europe on the whole want a federal state, with all the loss of sovereignty this involves"

    Nonsense, that has nothing to do with it.The Central Committee will decide.

    We are the Eurons.You will be assimilated.Resistance is futile.

    Litres, not pints.There will be adjustments but the Brits will get used to it. Big Brother knows and knows what's best.

  • rate this

    Comment number 336.

    #329 Phffft

    --"Those thoughts equally apply to the UK,my vote will go to,Keeping some distance from a Federal Europe but a close working common market."

    --It appears your hope is fast receding unless the UK is willing to place itself as much less than a minor European partner.

    The way things are going --Britain may be forced into such a position.

  • rate this

    Comment number 335.

    Pfft: my vote will go to,Keeping some distance from a Federal Europe but a close working common market

    So you would vote In but Out?

    Britain has a lot of international power as is

    If it gives up its sovereignty fully to be in EU
    then it will likely lose or diminish much of that power

    If it opts out of EU
    it will be black sheep in the family

    Either way you win
    Either way you lose

  • rate this

    Comment number 334.

    328. quietoaktree

    May be us British are so awkward that we are not able to integrate with any thing or one.We do have some strange customs from Morris dancing to cheese rolling.Then we will quarrel with our selves & reintroduce Hadrian`s wall & Offa`s dyke.Hmmm as for that last one nah,best not...

    Good night all.


Page 1 of 18



BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.