The outcome of the two-date European Union Summit has sparked hope but skepticism as the Eurozone block united towards further fiscal integration under a new separate treaty.
The outcome of the Summit has left financial markets uncertain whether or when more decisive action will be taken to stem the prolonged debt crises in Greece, Portugal, Ireland, Italy and Spain; but progress has yielded modest gains on global markets and has presented a grand opportunity for the European Union to emphasize the strength of supranationalism. After 10 hours of talk, that carried on Friday morning, all 17 Eurozone members and 9 other aspiring members have resolved negotiations on a new treaty along with the reforms to the EU treaty (Lisbon Treaty). The agreement reached calls for tougher deficit and debt regime to avoid a repetition of the debt crisis in the future. So saying, a new treaty could take 3 months to negotiate and requires referendums in some countries, such as Ireland. In the meantime, the European Central Bank (ECB) will be vital in the coming days with markets doubting the strength of Europe’s financial measures to protect vulnerable economies such as Italy and Spain. The ECB has agreed to keep purchase of Eurozone government bonds capped for now and not take extra precautionary measures. The purchasing of bonds by the ECB were a highly debated and controversial issue, most vocal opposition came from the Germans which viewed the actions as demeaning considering the calls for budget control, reform and austerity measures. The purchasing of bonds represented a temporary relieve for many nations, allowing them to grow law in a time of urgency and severity, further perpetuating the fiscal crisis in Europe. The ECB cap decided by the bank’s governing council has limited bong purchases to around 20 billion Euros a week. Evidently, with Standard and Poor’s move to issues warnings throughout the Eurozone of potential downgrade, as well as taking preemptive moves to downgrade multiple French banks, the threat of market and public volatility is very real and the EU must make steady progress to catalyze on the time allotted to them.
“This is a breakthrough to a union of stability. The fiscal union will be developed step by step. We will use the crisis as a chance for a new beginning. We achieved an important step towards long-term stable Euro. You can say it’s the breakthrough to the union of stability. The stability union, the fiscal union will be developed step-by-step in the next years, but the breakthrough has been achieved.” – Angela Merkel, German Chancellor
The new treaty for the Eurozone and aspiring members is supposed to create a fiscal union or a merging of the budgetary policies of the 23 countries involved in the EU. Among the key elements are debt brakes, which set a maximum budget deficit of .5% of the countries’ gross domestic product and should be enshrined into the countries basic legal framework. Beginning in 2016 and once this policy is in fully effect, Germany’s deficit limit will be at .35%. Another element are budget checks, in which members would be expected to present their national budget proposal to the European Commission before final approval by their individual legislatures. In a step towards escalation of supranational power, the Commissions’ sanction powers under the infringement procedure have been magnified. If the Commission identifies violations of the fiscal union’s rules or if a country’s deficit is too high, then the Commission can automatically initiate pre-determined sanctions. This can only be stopped by 2/3rd agreement of the finance ministers. Lastly, the new agreement has loudly rejected the concept of members pooling their debt under Eurobonds.
“The 17 member states of the Eurozone and already many others are committed to a new fiscal compact, a new European fiscal rule to be transposed in national legislation. It is more about fiscal discipline, more automatic sanctions, stricter surveillance. An intergovernment treaty will make this agreement binding in combination with secondary legislation and firm political commitment this will give the fiscal compact its full force.” – Herman Van Rompuy, European Council President
In addition, with the treaty preparation on the horizon, the pressure from international investors, credit rating agencies and Eurozone members is still paramount. With a large number of EU countries at risk of joining the ranks of the highly indebted, the new agreement has included some emergency measures for short-term predicament. One such agreement is an International Monetary Fund (IMF) emergency fund. Within the next 10 days, the Eurozone members are to resolve negotiations on the transfer of 200 billion Euros to the IMF. The money is meant to serve as loans to bankrupt government, such has been the case in Greece repeatedly. The money is only to be given under strict conditions. Another element from the Merkozy reforms is the acceleration of the implementation of the European Stability Mechanism (ESM), to replace the current European Financial Stability Facility (EFSF). The 500 billion Euro EFSF will have to be funded with money from national banks sooner than expected as the ESM has been agreed to become established in the summer of 2012. for now, the EFSF will not have a banking license; therefore, it will be unable to borrow from the ECB. Which countries can get loans from the facility will be decided by a majority vote of 85%, a reform pushed for by President Sarkozy but Germany is the country with veto power. Lastly, with private investors holding the reigns of market outlook for the EU, recent “hair-cuts” on their investment in Greece have not vindicated the strength the EU has tried to demonstrate. Therefore, the idea of involving private creditors in national debt restructuring or debt cuts has been abandoned. This serves as a clear signal to the financial markets that government debt can now be purchased without any extra risks.
“So this, we should not forget, what is our aim The aim is to reinforce discipline, reinforce convergence and to reinforce governance of the Euro area, not necessarily for all 27, but for the Euro area.” – Jose Manuel Barroso, European Commission President
In retrospect, the summit has yielded substantial progress for the future of the EU, as well as hope for the true unionization of the supranational entity. Nevertheless, much of the agreement rests on full cooperation, successful implementation and in the end, the regulations and guidelines must be upheld by a supervising force, which in this case is the European Court of Justices. Many of the ideas have been implemented in the past but without successful regulation or supervision, the guidelines grew flexible and forgotten, allowing the high levels of deficit in countries like Greece. So saying, the EU cannot lose itself in the hype of reforms and immediate progress but must maintain careful perseverance and cautious supervision over any an all members. Therefore, with countries like Hungary, Czech Republic and Sweden still on the edge about committing to the reforms, waiting for further deliberation with their national governments, the EU must maintain vigilance.