Stronger levee

Euro zone leaders pulled another rabbit out of their collective hat this week by striking yet another deal. They have managed to buy themselves more time — but buying time is the name of the game since the beginning of the euro crisis, which forces governments to both address the immediate crisis and redress the flawed euro architecture. On the face of it, Germany has made the concessions needed to help Italy and Spain breathe this summer, and sweep the larger French problem under the carpet. But Angela Merkel can always demand its pound of flesh at a later stage.

The euro leaders’ statement keeps deliberately vague on details, but it goes some way to please Madrid and Rome. First, the European Stability Mechanism (ESM), the euro bailout fund, will be allowed to recapitalise banks directly — something Germany had until now resisted. Second, the bailout funds will be called upon to ‘stabilise markets’, which will most likely translate into bond buying if need be. Finally, the conditionality principle will not go much further than making sure that needy euro zone members stick to the current fiscal and economic commitments, and abide by the European Commission’s so-called ‘country-specific’ recommendations.

This doesn’t mean that Angela Merkel has suddenly dropped her guard and embraced the southern Europeans’ approach on how to deal with the crisis. Beyond the immediate market concerns, the most significant decision of the summit by far is the plan to create a single banking supervisor, under the ECB umbrella. Only once it is established — which will take months in any case — will the ESM be able to recapitalise the banks directly. But that supervisor, conceived as a first step towards a full-fledged banking union, is unlikely to see the light of day if Germany can’t secure the concessions it wants from its partners on a tighter fiscal union, implying closer economic policies.

The rough deadline for this is the end of the year. If in the meantime markets remain unconvinced by Spain’s and Italy’s performance, and if France keeps resisting the reforms its economy needs, the euro zone will only have gained time at the price of disaster. But for the time being, the leaders are pursuing the right method.