Friday, March 25, 2011

Europe’s incredible shrinking bargain

Financial Times
March 25, 2011

This week’s European Council summit was once hoped to produce a “grand bargain” that would decisively address the sovereign debt crisis in the eurozone. Cynics will conclude from the meeting that the only concrete contribution Europe’s heads of government could muster was to rename the Franco-German pact for competitiveness the “Euro Plus Pact”.

Throughout the financial crisis, Europe’s elected leaders have rarely missed an opportunity to disappoint. True, some substantial agreements were made in advance of this latest meeting, ready to be rubber-stamped by the council. One was the pact, under which eurozone nations – and six mostly east European non-euro members – commit themselves to reforms aiming at long-term fiscal consolidation and competitiveness. But this does nothing whatsoever to solve the current crisis. The eurozone also agreed on a sovereign debt restructuring mechanism. A good idea, but it will only come into effect in 2013 and, again, does not help with present problems. In fact, it could make them worse: the official nod to a procedure that explicitly allows for haircuts on sovereign debt in extremis sent yields on troubled bonds higher.

Changes that had been prepared to improve Europe’s only serious tool to contain panicky bond markets – the European financial stability facility – were left in limbo. Agreement “in principle” had been reached to equip the EFSF with the full €440bn of firepower it nominally enjoys. But principle only goes so far: with German and Finnish elections looming, the decision on how to raise the EFSF’s lending capacity was put off till June.


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