On the Telegraph blog, we argue:
Judging from some media reports across Europe – and some positive
market reactions, the eurozone crisis has just been solved. Italy and
Spain scored a massive victory over Germany. Angela Merkel has caved in.
Berlin has blinked.
Hardly. Though Merkel took a bit of a beating
and some unexpected progress (the term is used loosely) was made, the
primary achievement was to shift yet more of the burden from banks and
governments in the south to taxpayers in the north, via the eurozone
bailout funds. Nothing fundamental has been solved. Here’s why:
Recapitalisation of Spanish banks still faces hurdles:
In future, the eurozone’s permanent bailout fund, the ESM, will be able
to directly recapitalise banks in the eurozone, without first passing
the cash through national governments. This could help Spain,
as the loans won’t count towards Spanish government debt. But no more
money is on the table, and the changes will only happen when the ECB has
shouldered the role as supervisor for banks in the eurozone and ESM
rules are reworked. Judging on past record, this can take time. Merkel
has also indicated that the changes to the ESM will have to be approved
by the Bundestag, which won’t be comfortable given the already strong
reaction from backbench MPs.
The bailout funds are still not big enough to stand behind Spain and Italy:
The two bailout funds – the EFSF and ESM – could be allowed to buy
government bonds with only existing EU targets in place, ie. no
Greece-style monitoring programme. To consider this a game-changing move
is an illusion. First, it is merely activating a previous EU decision –
so Germany has agreed to no new instrument. Second, unlike the ECB, the
EFSF and ESM don’t actually have the funds to backstop Italy and Spain
– their bond buying is likely to be tested by the markets and could
prove counterproductive. Perversely, if conditionality is indeed relaxed
it would provide a pretty strong incentives for other countries – such
as Italy – to tap the bailout fund. Hardly desirable.
EU loans will remain senior: The conclusions suggest
that any loans made by the EFSF and then transferred to the ESM (i.e.
the Spanish bailout) will not be “senior”, ie taxpayers and financial
institutions will take losses simultaneously if a debtor country fails
to pay back the cash. In reality though, as the restructuring in Greece showed, official loans have always been treated as de facto
senior. This is not necessarily a bad thing since it protects
taxpayers, but it simply adds to the confusion and often only delays the
Ireland will get easier terms on its bailout: This
is significant for Ireland, and an effective admission that the EU might
have been wrong to force the country to bail out its banks and carry
the burden on its sovereign debt alone. How much can be done this far
down the line is unclear, but the positive sentiment could help the
The ECB as bank supervisor has merits – but comes with pitfalls:
The aim seems now to have the ECB taking over the responsibility as
chief bank supervisor in the eurozone by the end of the year, or at
least an agreement to that effect. As I’ve noted before,
the proposal comes with merits, but for better or worse, could be very
significant for the UK if taking to its logical conclusion (resolution
fund, deposit guarantee scheme, super-harmonised regulation), with the
risk of fragmentation of the single market (as UK itself cannot take part). But this will take a lot of fiddling to sort out.
What’s clear is that Germany has not moved on debt pooling, including eurobonds. The German government firmly denied suggestions this morning
that anything had been agreed on this front. But the summit deal has
caused a lot of bad blood within Germany. Apparently, Italy and Spain
threatened to veto the €120bn growth package proposed by Hollande if
Merkel didn’t give way (incidentally, given that these two countries
were meant to be the chief beneficiaries of the ‘growth’ package, its a
sign of how seriously – or not – people take this proposal). The episode
has left Germany seriously frustrated and with a feeling of an ever
increasing weight on its shoulders.
Paradoxically, this may have the effect of hardening German
resistance to debt pooling in the eurozone. Yet again, the focus shifts
to German domestic politics.