European Union leaders, after tense negotiations in their summit in Brussels, made progress June 29 in their efforts to contain the European financial crisis. The results, which were much better than had been expected by market players and included important decisions, underlined the EU leaders’ strong determination to work together toward a tighter union, although many problems must be solved to achieve that goal.
It also should be noted that concessions made by Germany, a strong voice for austerity measures among eurozone nations suffering from a sovereign debt crisis, helped to spur agreement at the summit. Germany made correct concessions.
The summit was held at a time when a crisis was assailing Spain and Italy, the 17-nation eurozone’s No. 4 and No. 3 economies, respectively, more than two years after Greece’s sovereign debt crisis surfaced in 2009.
One of the decisions adopted at the summit will be helpful in solving a problem faced by Spain. Eurozone countries had expressed their readiness to inject up to €100 billion in aid to Spanish banks, but the bailout loan first had to be provided to the government, which then would lend the money to banks. This meant increased debt on the government’s books because the government was responsible for repaying the money. This caused investors to raise fears about the government.
The summit leaders agreed to let the European Stability Mechanism inject the money directly into banks, thus avoiding an increase in the government’s debt.
The switch to direct aid will prevent financial crises at banks from leading to financial crises for governments. Germany had opposed the idea of direct aid but eventually changed its stance.
At the insistence by Germany, the EU leaders also agreed to introduce a joint regulator to oversee operations of European banks. Currently individual governments are regulating banks. But they have not been necessarily watchful enough and quick enough to take appropriate action toward banks.
The establishment of a joint banking supervisory body will help remove fears about eurozone banks.
In recognition of the risk of concentrating on austerity damaging the economy, the EU leaders agreed to pump in €120 billion to fund infrastructure projects and job creation.
Although the EU leaders came up with results that satisfied market players to some extent, such issues as deposit insurance, bank insolvency and the issuance of common eurobonds remain to be solved. It will be important for the EU to show a concrete path toward a tighter union, although some resistance is inevitable because it will require member countries to give up more of their sovereign powers.