The 2-day EU summit may have produced some actual movement that at least gestures in the direction of better policy.
After tough all-night bargaining, European leaders appeared to salvage what had seemed to be a summit teetering toward failure by agreeing early Friday to use the continent’s bailout fund to funnel money directly to struggling banks, and in the longer term to the idea of a tighter union.
The bank decision at overnight meetings in Brussels was aimed at helping Spain, which sought a €100 billion rescue to help its troubled banks and wound up facing rising borrowing costs for the government.
European Council President Herman Van Rompuy called it a “breakthrough that banks can be recapitalized directly.”
In addition, the leaders agreed that EU countries that were following budget rules could apply for bailouts that would not come with the stringent conditions that have accompanied previous EU bailouts — a recognition, said Italian Premier Mario Monti, who pushed for the deal, of the work such countries were already doing in reforming their budgets.
I’m not really a fan of giving shots of free money to banks instead of people, but direct recapitalization is sounder and a rejection of the stringent terms to force austerity on struggling countries is a relief.
A couple other positives came out of the meeting. EU leaders agreed to a small stimulus fund of around €120 billion, to create jobs and economic growth. That’s certainly too small, but better than nothing, and an ideological rejection of austerity. In addition, the countries agreed to a single bank supervisor for the Eurozone, which is a prelude to joint deposit insurance, which could prevent “bank jogs” of the type we’ve seen. Moreover, the ability to inject funds into banks directly should lower borrowing costs for Spain and Italy, as their governments won’t be on the hook for the recapitalization. The debt will never touch the government’s books.
That agreement on a tighter fiscal union, which looked really awful to me, was only described in “building blocks” and not formal terms. That’s mainly because it included eurobonds, and Germany flatly rejected that this week.
All in all, this is a much better outcome for the EU summit than anyone expected. Things get a little less punitive for the struggling member states, and they get a bit more money to further growth. Global markets seemed to like the news.
Of course, this doesn’t mean that the clouds have lifted. The details for the eventual fiscal union, designed to “make the euro an irreversible project,” according to European Council head Herman van Rompuy, are very sketchy. And if they don’t include large fiscal transfers across governments, from the strong to the weak, then eventually, we’ll be right back here again. There’s nothing in the agreements to permanently buoy growth or deal with current account flows. And there’s still way too much appetite for austerity, in fact permanent austerity, with a tight fiscal union, where technocrats could gain control of national budgets. Governments got a win at the summit, but it’s not yet clear whether people will.