Europe's 'last chance' to solve debt crisis

Belgium’s prime minister, Elio Di Rupo, arrives for the EU summit in Brussels last night. The German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, will try to build support for their plan for euro zone nations to submit their national budgets to greater scrutiny.Show less

AMSTERDAM // Confronting major questions about the future of the euro zone, European Union leaders started a crucial two-day summit in Brussels last night.

They are meeting to restore confidence in the single currency by finally dealing firmly with the debilitating debt crisis facing the bloc.

Yesterday, a European regulator said the continent’s banks must raise US$153.8 billion (Dh565bn) to meet a new standard meant to inoculate the institutions against market turmoil and bad government debt.

European banks have billions of dollars of risky government bonds on their books, and as the continent’s crisis has deepened, investors have become concerned the institutions will not be able weather expected losses.

In response, European Union leaders decided to force banks to raise more money. The European Banking Authority said yesterday that banks need to raise US$153.8 billion to meet those requirements.

In another sign of the huge market pressure on Europe’s borrowing abilities, the rating agency, Standard & Poor’s, on Wednesday night put the EU itself and its banks on notice that they could lose the highest credit rating.

The agency had earlier warned 15 euro zone countries, including Germany, that their ratings were in danger of being downgraded.

The European Central Bank (ECB) to whom many are now looking for a solution, yesterday lowered its main interest rate to 1 per cent.

That is as low as during the financial crisis in 2008 but not as low as some analysts had hoped for. But all eyes remained on the meeting in Brussels, as it is widely accepted that far-reaching reforms of the EU and its institutions are necessary to solve the problems in the euro zone and beyond. This has led to escalating political tensions in the bloc.

Nicolas Sarkozy, the French president, dramatically highlighted the stakes yesterday at a meeting of Conservative Euro leaders in Marseille ahead of the Brussels talks.

“Never has Europe been so necessary and never has it been in so much danger,” he said. “Never has the risk of Europe’s explosion been so great. If we don’t have agreement on Friday we won’t have a second chance.”

The outline of a deal between the euro zone’s two main players, Germany and France, emerged over the past week, but a host of financial and political obstacles continue to bedevil the policymakers.

Borrowing rates for weaker euro zone countries remained under pressure and non-euro zone EU countries such as Britain, worried at being sidelined, raised new demands of their own.

Even so, as the euro zone crisis threatens the economy of the entire EU and the global financial system, expectations were that the bloc would lurch towards a deal.

Hillary Clinton, the US secretary of state, yesterday stressed the importance of Europe handling the crisis. “We have great confidence in Europe. There is absolutely no doubt about that. But we do need a plan to rally behind to know the way forward,” she said in a message to the EU’s leaders.

Angela Merkel, the German chancellor, and Mr Sarkozy – snidely referred to by some European media as “Merkozy” – sent their proposed measures to the EU on Wednesday, along with a call for rapid action.

“We are convinced that we need to act without delay,” they said in their letter to Herman Van Rompuy, the president of the European Union.

But the measures they proposed and the way they seek to implement them almost guarantee a long and drawn-out process.
The deal focuses heavily on budget discipline in the 17 euro zone countries, even imposing automatic penalties on excessive spending.

This has been a major German demand, as the country seeks to expand its own brand of fiscal prudence to the rest of the euro zone.

But such European interference would mean a substantial loss of sovereignty for the participating countries. Oversight would be in the hands of the European Commission in Brussels and the European Court of Justice in Strasbourg.

For that to be possible, a change to the European Union treaty for all 27 EU members, including those that remain outside the euro zone, is probably required.

The process of ratification of a full EU treaty change can be long and tortuous.

Some countries may require national referendums and the British prime minister, David Cameron, has vowed to use new EU treaty negotiations to press for UK demands.

This is why Mrs Merkel and Mr Sarkozy mentioned the possibility of not seeking treaty changes after all and just having the euro zone countries sign up to the deal, a path favoured by the EU’s bureaucracy.

The as-yet-unstated trade-off for weaker economies would be German agreement to a more active role for the ECB.

There is a consensus among markets and analysts that the ECB needs to be able to act as a lender of last resort for troubled euro zone economies.

Germany is resisting this expansion of the ECB’s remit because of strong domestic opposition, driven by a fear of inflation and by the worry that as the richest country in the euro zone, it would have to supply most of the money. Even ECB action may not be enough to stem market concerns over the solvency of some European governments.

Fabian Zuleeg, an economist at the Brussels-based European Policy Centre, a pro-EU think tank, said that apart from budget discipline measures and ECB intervention, a European “Marshall Plan” was also needed to encourage investment in weaker countries and ensure long-term economic growth.

“It is very important that we start discussing how other European partners can support growth in these countries,” said Mr Zuleeg. “It is not going to be done by these countries themselves. There has to be some form of help from the European partners.”

This help should come from euro zone and other EU countries as their economic interests are intrinsically linked, added Mr Zuleeg.

Britain’s threats to block a deal on the euro if it were not to its liking, were unhelpful in that context.

“There is always a free-rider problem that, if someone else is doing it, why should you spend your own money?” said Mr Zuleeg.

He warned that this not only posed economic problems but also created political tensions that the EU could do without right now.