Friday

12th Aug 2022

Analysis

EU summit deal leaves many questions open

  • The summit marked the end of Denmark's turn as EU presidency under prime minister Helle Thorning-Schmidt's leadership (Photo: The Council of the European Union)

The EU summit has failed to produce a big step towards a political and economic union, say analysts, with measures adopted to help out Spain and Italy seen as "palliative" and vague plans to establish a central banking supervision

The decisions were enough for markets to rejoice on Friday, with the euro gaining ground and Italian and Spanish borrowing costs going down. But as with all previous EU summits, markets are set to fret once they have a closer look at the deal.

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In their statements after the summit, leaders spoke of a €120 billion growth pact - although it mostly consists of existing unspent money - a "historic" deal on the EU patent and a "breakthrough" for Italy and Spain.

But on the long-term confidence-boosting plan for the eurozone, there was little headway on the actual proposals - mutualising debt, establishing a eurozone treasury, ceding budgetary powers to Brussels.

The agreement was instead on the "method." EU council chief Herman Van Rompuy and the three other chiefs - of the EU commission, European Central Bank and Eurogroup of finance ministers - were told to have another go and report back in October, this time involving member states and consulting the European Parliament.

The only two concrete steps were giving banking supervision to the European Central Bank and using the ESM bailout fund to prop up banks directly and to buy up bonds.

But even that is steeped in process. The funds cannot be released before "an effective single supervisory mechanism is established," the summit concluded.

And this supervisory mechanism will be considered by the end of 2012. EU commission chief Jose Manuel Barroso said the commission will table proposals "during the summer."

In addition, the deal also raises questions about whether the bailout funds are sufficiently stocked. The temporary and forthcoming funds have some €450bn between them this year - but up to €100bn is already pledged for Spanish banks.

Under intense pressure from German parliamentarians, who phoned her during the late-night summit and urged her not to make any concessions on the bailout fund, German Chancellor Angela Merkel had a few tough exchanges with Italian Prime Minister Mario Monti.

In the end, Monti accepted that there can be no 'free money' and that Italy too would need to sign up to a memorandum of understanding if it wants its bonds bought up by the bailout fund.

But Merkel had to give up the involvement of the International Monetary Fund which has so far funded and monitored three eurozone countries - Greece, Portugal and Ireland - and which will be consulted on a "technical level" in the Spanish bailout for its banking sector.

"There is nothing for free, conditionality is absolutely key," Van Rompuy said at the final press conference, in line with the Merkel position.

As for Barroso, who used the term 'big leap' ahead of the summit, he said the decisions taken Friday would have been "unthinkable a few months ago."

"This is definitely not enough. It may help Spanish banks for the moment, be we don't know what will happen to the others. There is no solid foundation and these deals are just palliatives, not solving the real problem," Diego Valiante, an economist with the Brussels-based Centre for European Policy Studies told this website.

He questioned the effectiveness of the ECB supervision, so long as it does not have "real powers" to overstep national law in bankruptcy cases and wind down banks.

Questions also remain about the ECB's jurisdiction when it comes to banks based outside the eurozone but operating in a euro-country. Or vice-versa. There are several Austrian and German banks in non-euro eastern European states.

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