A turning point in the European project. The outcome of the special eurozone summit of Thursday 21 July marks a turning point in the history of the European project, ending the imbalances in economic and monetary union (EMU) between the monetary and the economic arm. A number of sticking points were ironed out that had seemed insurmountable ahead of the summit. The special issue of this newsletter (EUROPE 10424) summarised the results while explaining their significance, reported on the comments made by the president of the European Council and the various heads of state or government in the eurozone, and also published the final statement. This is an outstanding issue that stands on its own for readers, and I need to do no more than add a few comments.
1. A new EU budget tool. This is the best way to describe the body that will now oversee financing in the eurozone over and above the EU's normal budget, because it is guaranteed by member states rather than the European Central Bank (ECB). The EFSF (to be called the ESM from 2014 onwards) will no longer have to wait until a full crisis erupts in a member state, but will be able to take preventative action by buying up the bonds of struggling countries and lend cash to countries having to bail out their banks. This amounts to the creation of an EU budget tool, a key component of European governance, that will also determine how national debt is managed (like the special facilities granted to Greece) and how beneficiary countries are to behave (see point 5 below).
2. A great leap forwards in governance. The last paragraph of the Final Declaration urges the president of the European Council, Herman. Van Rompuy, to work closely with the presidents of the European Commission (Barroso) and Eurogroup (Juncker), and submit proposals in October this year to improve crisis management and working methods. Angela Merkel and Nicolas Sarkozy have said that they will be publishing joint proposals to this end at the end of August or beginning of September. European governance of the eurozone is therefore a done deal, yet only a few months ago it seemed a pipe dream!
3. Partial solution to the question of credit rating agencies. Credit rating agencies commented before the summit that some of the measures decided upon for Greece on Thursday would amount to a default or selective default. Now that the measures have been taken, will they say that Greece is in default? A priori, it looks like Fitch will. Asked about this, Nicolas Sarkozy said that he wasn't a rating agency and didn't use such terms, pointing out that Greece would repay its debt even though the criteria have been eased (or, as Angela Merkel put it, the burden has been lightened)). The Final Declaration states in paragraph 15 that the Commission will unveil proposals about the idea of setting up an autonomous EU rating agency. Several factors seem to indicate that the summit agreed to let Greece enter a selective, temporary default, but felt that this should not be viewed negatively by the rating agencies.
4. No alternative to voluntary bank contributions. The official documents stress the voluntary nature of the contributions from banks in the second Greek bailout; but it is quite possible that the threat of a new tax on banks (not mentioned in the Final Statement) was enough to get the banks to agree to bear some of the losses (give up some of the gains from the bonds they had bought at extortionate interest rates). This does not mean that bank contributions will always be voluntary.
5. The Commission to advise and monitor. The European Commission has set up a mechanism whereby it can advise Greece and make suggestions where necessary about the economic and legal changes needed for its recovery. This aim is shared by the Greek prime minister, George Papandreou, who said that the Greeks were creative and industrious and demanded the right to make root-and-branch changes in the country. It would be accurate to say that the Commission's mechanism will have a dual role - both advising and monitoring - especially because the Commission has also announced future finance and a softening of the rules for the granting of Structural Fund aid and national co-financing for struggling countries. The eurozone introduced the conditions required for recovery, but nothing will be possible until Greece itself makes the necessary domestic changes.
Watch this space. This initial overview of the significance of the summit that will go down in the history of the European project is not comprehensive and I will be examining further aspects in my column in the future. (F.R./transl.fl)