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.

'Game-changer'

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
    +8

    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
    +6

    Comment number 180.

    169 lordken

    "The interest rate for Spain and Italy would have been unsustainable and they could not be bailed out"
    =
    I don't know about Italy but the interest rates for Spain were always above 6% so other factors rather than the euro must have been responsible. They survived and remembering their generally unhappy history during the 20th cent they enjoy an unprecedented life style today.

  • rate this
    +6

    Comment number 47.

    Reading between the lines, Merkel has given zilch in handouts. The promised funds are not available for at least 9 months, with tough strings attached. Hollande has just received some very bad news on the French economy and his tax and spend agenda is about to crumble. The sticking plaster this time is stuck on with milk. Next week the markets will surely, rip the heart out of this latest scam.

  • rate this
    +6

    Comment number 94.

    92 Kiran Vasudeva
    "You are right when you say only pledges have been made with no substantial reforms. All it takes to reform is pass legislation to that effect"

    You are both wrong. Monti's background includes among other things the reform of the pension system and the labour market. Laws currently enforced in the Italian Republic.
    Always mind boggling the confidence of tone by the uninformed.

  • rate this
    +5

    Comment number 46.

    So let me try to understand this - the governments contribute to the ESM who can now give money directly to the banks, who can then in turn use this money to invest in Government bonds. This is so blatantly wrong - I am not allowed two bank accounts in the same branch that write increasingly bigger bad checks between them.

    Also where is Spain getting their 83 billion ESM contribution from???

 

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