Following a period of relative calm in the euro zone since the New Year, markets have again been jumpy over recent days. Credit agency Moody’s not only cut the debt ratings of a beleaguered Greece yet again, but on Thursday downgraded Spain’s rating by one notch, to Aa2.
Spain is one of Europe’s largest economies and its fate will have an existential impact on the future of the euro. Meanwhile, the country widely expected to be next in line in terms of needing a European Union bailout, Portugal, has found its borrowing costs for two-year debt hitting new highs.
Hence, the attention of the political and financial worlds of Europe was focused on this city, as a special meeting of the 17-member euro zone leaders got underway here late this afternoon. The outcome will contribute to determining the market reactions, crucial not only for the region’s faltering PIIGS (Portugal, Italy, Ireland, Greece, Spain) economies, but for cohesion of the euro zone as a whole.
At today’s meeting, euro zone heads of state were considering adopting a ‘Pact for the Euro’, a set of rules and guidelines intended to coordinate the economic policies of the 17 countries more closely and eventually to boost the bloc’s competitiveness. The ‘pact’ is a watered-down version of a Franco-German proposal made earlier in the year, dubbed the ‘pact for competitiveness’. It had proposed to ask euro zone countries to adopt greater fiscal discipline and harmonise a range of policies, from retirement ages to corporate taxation. In return, Germany had indicated willingness to support proposals to boost the value and scope of the ¤440 billion bailout fund for member-countries.
The proposal proved unpalatable to many euro zone members, from those who objected to clauses relating to the end of inflation-linked wage increases to those who did not like the idea of synchronising retirement ages. Following the mediation effort of European Council president, Herman Van Rompuy, the initial ‘competitiveness’ pact has been softened, leaving individual countries with far more leeway to decide what to do. The idea of bringing corporate tax systems closer together, something Ireland in particular is vociferously opposed to, is another contentious issues that leaders are looking into today.
Divisions on answers
The outcome from today’s meeting is expected to be modest. Some agreement on measures to limit public deficits and perhaps gradually increase retirement ages to reflect demographics is possible. But while euro zone leaders will undoubtedly tout the results as a major breakthrough, most analysts say the reluctance to embrace stricter rules will undermine the endeavour to keep the region’s head above turbulent waters.
More, some regard competitiveness as a more long-term issue, that will do little to tackle the immediate problems facing the bloc -- bad banking debts and heavily-indebted sovereign nations, with poor growth prospects. Debt restructuring, something analysts are increasingly arguing as inescapable, especially for Greece, remains an anathema to European leaders. They’re instead looking to bolster the European bailout fund as the chief way of restoring faith in markets and investors.
But after its ‘competitiveness pact’ was rebuffed, Germany is again looking reluctant to commit its financial muscle to rescuing the bloc’s less robust and fiscally lax economies.
The three-year European Financial Stability Facility (EFSF) is notionally worth ¤440 billion, but in practice it can only provide half that amount if it is to maintain the requisite capital buffers. In 2013, the EFSF will be replaced with a permanent European Stability Mechanism but the size and powers of this mechanism remain undefined. Including, the issue of whether it can buy up euro zone government debt.
Today’s meeting is supposed to lay the groundwork for another summit, this one a full 27-member EU leaders’ get-together on March 24-25. Many tough decisions are likely to be left to this summit, rather than be resolved today. However, the worry is that final decisions on these thorny matters will remain deadlocked even by the end of the month, the EU’s self-imposed deadline to get its euro troubles sorted, sending markets into the kind of tailspin that will force Portugal to seek help from the EFSF.
