• Nobel-prize economist Paul Krugman in his blog on 15 November: 'ECB bail-out or bust. And it's looking like bust' (Photo: consilium.europa.eu)

Feature

What did the EU agree at its 'make-or-break' summit?

09.12.11 @ 18:38

  1. By Andrew Rettman
  2. Andrew email

BRUSSELS - Amid the fog of terminology, draft and final conclusions and annexes, not to mention allegations and denials by EU polticians over the past 24 hours, EUobserver tries to make sense of what the summit actually agreed.

What the EU agreed

A new EU20, EU26 or EU-something-in-between treaty on financial discipline

Also known as the "fiscal compact" and containing "debt brakes" and "golden rules", the intergovernmental treaty is to be agreed by March 2012 "at the latest."

It will cover all 17 euro-using countries plus Latvia, Lithuania and Poland. Bulgaria, the Czech republic, Denmark, Hungary, Romania and Sweden are to check with national parliaments if they should join. The UK - sensationally - is staying out.

Countries must introduce a 'debt brake' into their constitutions or at an "equivalent" legal level, requiring balanced budgets, which are defined as not exceeding deficits of 0.5 percent of GDP.

Countries which breach a three percent deficit limit will face sanctions at EU level unless they cobble together a blocking majority.

The European Commission will carry a big stick: it will look at national budgets before national MPs and make demands. It will also be able to parachute in teams of budget inspectors to national capitals and push countries to apply for bail-outs even if they do not want to.

A more market-friendly bail-out fund

A new-model European Stability Mechanism (ESM), a permanent Luxembourg-based €500 billion bail-out fund, will be agreed "in the coming days." It will come into life in July 2012, not in 2013 as previously planned and will replace the current €440 billion European Financial Stability Facility (EFSF). Private lenders to countries that take rescue packages will not be asked to write-off part of the debt.

Funneling more EU money back to the EU via the IMF

EU countries will pay an extra €200 billion to the Washington-based International Monetary Fund (IMF) to be used to part-finance future bail-outs. It is hoped the move will encourage countries beyond the EU to also pay in more, with Brazil, China and Qatar already expressing an interest.

Eurobonds, maybe, in the long-term

EU Council President Herman Van Rompuy's office will produce a feasibility report by March 2012 on the issuing of common eurozone bonds in the "long term." Germany previously said "No" to this, but more recently has indicated it is just the timing that is wrong.

More summits

Eurozone summits - a novelty of 2011 - are to be held "at least" twice a year. German Chancellor Angela Merkel said the EU27 should hold regular summits every month unlike the current arrangement of four times a year plus emergency events.

What it did not agree

No new EU treaty

The UK said it would not back the fiscal compact because other EU countries refused to give in to its demands to shield the City of London from potential EU taxes and regulators. This means the Lisbon Treaty will remain unchanged and the new intergovernmental agreement will stand alongside it - not so much a two-speed Union as a faster Union with the UK left behind.

No big bazooka

Proposals to let the ESM and EFSF stand side-by-side after 2012 with a joint lending power of €940 billion (still not enough to bail out Italy and Spain if needed) were quashed by Germany.

No ECB money-printing

Proposals that would allow the European Central (ECB) bank to underwrite ESM and EFSF debt, effectively giving them infinite bail-out resources - a solution favoured by the markets - were quashed by Germany.

The known unknowns

Will the ECB buy more bad debt?

Speaking to MEPs last week, ECB head Mario Draghi said if there is a new fiscal compact "other elements might follow" - language widely understood as meaning more purchasing of weak Italian and Spanish debt. Speaking on Thursday he said "No" and added he was "kind of surprised" people understood him that way.

What bits of the new treaty will apply to whom?

Fuzzy language in the EU summit conclusions makes it unclear whether all the signatories of the fiscal compact will be covered by all of its aspects or if there is room for little opt-outs here and there.

"Some of the measures described above can be decided through secondary legislation. The euro area heads of state or government consider that the other measures should be contained in primary legislation," the summit statment said. It did not specify which parts are too important to be left to secondary laws.

What will the EU institutions do?

British leader David Cameron insisted that the EU institutions can only serve all 27 EU countries - a situation, if true, that would torpedo the fiscal compact.

EU Council and European Commission chiefs Herman Van Rompuy and Jose Manuel Barroso were less sure. Van Rompuy said: "We will find a large interpretation of the role of institutions." Barroso said: "The issues are exceedingly complex. We are looking at these questions, but we believe good results will come."

How will the EU bail-out fund make its decisions?

In an echo of the Cameron situation, the deal would shift governance of the EU bail-out funds from requiring unanimous decision-making to a qualified majority. But Finland wants to stick to unanimity. Its finance minister, Jutta Urpilainen, said on Friday morning Finland will quit the fund unless it gets its way.

Will there be EU-wide taxes?

The summit conclusions say EU leaders welcome "structured discussions on the co-ordination of tax policy issues" and that "particular attention should be paid to how tax policy can support economic policy co-ordination and contribute to fiscal consolidation and growth."

This - coupled with the facts the commission has called for an EU-wide tax on financial transactions and that France and Germany on the eve of the summit said the EU should have a common corporate and financial tax base - was enough to spook Cameron. But no explict deal on taxes has been reached yet.

Is it enough to convince markets?

The €1.1 trillion question (Italy and Spain's upcoming debt needs) that remains is: Will it be enough to save the euro?

Asian markets slipped on news of the UK decision. But EU markets climbed on the same news later in the day. On past form, EU bargains have given the bloc a few weeks of respite before rebels began undoing parts of the agreement and analysts realised it is much less impressive than it first looked, sending bond spreads skyward again.

Going into the summit, the prevailing theory was that if the ECB does not start printing money sooner or later, the euro will fall apart.