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No ‘grand bargain' means more stress
Published in The Saudi Gazette on 11 - 12 - 2011


Reuters
THE euro zone has agreed to take a big leap forward in economic integration, but failed to deliver a convincing answer to investors worried about its ability to tackle threatening debt crises in Italy and Spain.
As a result, the deal clinched by European leaders in the early morning hours of Friday seems unlikely to ease the intense financial pressures that have plagued the currency bloc for over two years. Nor will it dispel concerns that the euro area could eventually break apart, with one or more countries exiting despite the catastrophic consequences that would entail.
With Britain, the EU's third biggest economy, opting out of the fiscal process, questions about the cohesiveness of the wider bloc will also be posed.
Perhaps the most significant new element of the agreement sealed in Brussels was a green light for the euro area to provide the International Monetary Fund (IMF) with up to 200 billion euros in bilateral loans.
These funds could be used to extend precautionary credit lines to Italy and Spain, the euro zone's third and fourth biggest economies, helping them muddle through a debt refinancing crunch in the first quarter of 2012.
But barring a rapid return of investor confidence, these resources will provide Rome and Madrid with only a temporary respite, leaving markets jittery, and Italy at least has shown a marked reluctance to accept IMF help.
“It's not the grand bargain some people had been hoping for,” said David Mackie, an economist at J.P. Morgan in London. “A door has been opened with the IMF channel, but some people may say that 200 billion euros is simply not enough.”
The summit had been billed as “make-or-break” for the euro zone, whose leaders have looked on in horror as contagion has spread from Portugal, Ireland, Italy, Greece and Spain — to France and even the bloc's economic powerhouse Germany.
Stock markets headed higher on Friday but bond markets pushed Italian borrowing costs higher.
Even before the summit, officials in major euro zone capitals were identifying the new year as a potential crunch point if the markets took the view that the euro zone had fallen short.
Both Italy and Spain face a big refinancing crunch in the first part of 2012. Rome alone has a massive 150 billion euros in debt falling due between February and April of next year.
The agreement that was unveiled in Brussels had Berlin's fingerprints all over it.
Member states agreed to introduce German-style debt-brake legislation limiting annual structural deficits to 0.5 percent of gross domestic product (GDP).
Euro zone countries that breach the bloc's three percent deficit ceiling will face automatic penalties unless a qualified majority of members vote against.
Germany did fail in its campaign to convince all 27 European Union countries to write the tougher rules into the bloc's treaty, with Britain refusing to go along.
Instead the 17 countries of the euro zone, and nearly all the 10 non-euro EU members, are aiming to seal an inter-governmental agreement by March of next year — an approach which may allow the bloc to avert the need for troublesome and time-consuming national referendums in countries like Ireland.
But Berlin also made sure there was no increase in the combined firepower of the bloc's rescue funds - the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which is now set to come into force a year early in mid-2012.
And German Chancellor Angela Merkel quashed plans to give the ESM a banking licence, a move which would have allowed it to tap cheap funds from the European Central Bank (ECB). __


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