EU summit stirs little hope of curing what ails the euro
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Economic gurus have called on the European Union for bold and swift action at its Brussels summit to restore confidence in the euro by creating a banking union and collectively guaranteeing struggling members’ wobbly debts.
But all indications from the key players in Europe’s troubled integration project suggested investors and analysts should curb their enthusiasm, as little is expected to come out of the Thursday-Friday gathering of leaders deeply divided over the path forward.
German Chancellor Angela Merkel reiterated Wednesday that pooling debts and merging banking operations without centralized regulation would be “economically wrong and counterproductive.” Subjecting countries like Germany to the consequences of other euro users’ spendthrift ways also raises constitutional issues, she told the German Parliament on the eve of the summit.
“Because I know the expectations and hopes that are pinned on this summit, I will repeat right at the start what cannot be said often enough,” Merkel said. “There is no quick solution and no simple solution.’
Her view that bloc-wide structural changes are needed first to stabilize the euro were reflected in a blueprint issued Tuesday by European Council President Herman Van Rompuy in which the continent’s leaders laid out a vision for a ‘stage-based process’ for economic and monetary union. It speaks of ‘building blocks’ and ‘a working method’ to be identified by December for integration that would be accomplished over a decade.
Influential economists, including George Soros and Citigroup’s Willem Buiter, have urged the summit participants to find a way of allowing the European Central Bank to buy the bonds of heavily indebted countries, like Spain and Italy, to spare them the crushing interest costs pushing those nations toward the need for bailouts. Reducing their borrowing costs would allow the governments to spend on growth-oriented projects, which would create jobs, export income and tax revenue to help pay down debt.
In a commentary in Tuesday’s Financial Times, Soros proposed that the EU create a modified debt-redemption fund that would tap some of the ECB’s $875 billion in surplus cash to buy Spanish and Italian bonds at 1% interest, rather than the 6% to 7% yields demanded on the open market.
‘It would finance the purchases by issuing European treasury bills and pass on the benefit of cheap financing to the countries concerned,’ Soros wrote, warning of a fiasco at the Brussels summit if Rome and Madrid are forced to continue piling on unsustainable debt.
Spanish Prime Minister Mariano Rajoy urged his EU counterparts to help Spain recapitalize its banks without bankrupting the nation’s treasury.
“We face decisive hours in terms of the situation in the Eurozone and the economic measures to be taken in Spain,” Rajoy said, about three hours before Merkel told the Bundestag that there would be ‘no magic formula’ at the summit.
Market analysts have reacted to the seemingly irreconcilable positions likely to be taken at the summit with warnings to investors to keep their expectations low.
‘Traders may wish to hold back their excitement on this summit, as time and again, European leaders have over-promised and under-delivered,’ the online financial newsletter Benzinga said. The advisory added that hopes were probably ‘unfounded’ for any details coming from the EU leaders on how to create common banking regulation or a deposit insurance program like the United States’ FDIC.
The sole move forward that can be expected at the summit, analysts seemed to agree, is possible endorsement of a proposal for $162 billion in infrastructure and other growth-stimulating investments in the Eurozone. At a meeting in Rome last week, Merkel, Rajoy, Italian Prime Minister Mario Monti and French President Francois Hollande agreed to consider the spending package to battle recession and 11% unemployment across the Eurozone.
Although that bow in favor of growth was welcomed by those who consider Merkel’s commitment to debt paring too rigid, it was seen as too little to provide much of a boost for the economies that most need it. Markets are waiting for definitive steps toward a genuine monetary union.
‘It’s not possible on a Thursday to move a set of 17 sovereign states into a political federation,’ Barry Eichengreen, a professor of economics and political science at UC Berkeley, said of the Eurozone countries’ prospects for making much headway on economic integration. ‘There will be more talk. They will try to reassure the markets that meaningful steps are going to be taken soon to stabilize the banking systems, which is the most immediate weak link. But I think there will be no concrete action.’
Eichengreen agrees that European Central Bank intervention in the debt market can buy time for the Eurozone leaders to craft a strategy for integrating finances, budgets and policies -- the steps needed to restore investor confidence in the euro.
‘Leaders in Europe are at least talking now, which is a long ways from doing, but it’s the first step,’ Eichengreen said. ‘They’re talking about a banking union, fiscal union, political union, and those are all ideas no one thought seriously about even a few months ago.’
-- Carol J. Williams in Los Angeles