Eurozone summit fails to solve growing debt crisis

 
Tim Wallace
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EUROZONE leaders made only a few small steps towards easing the pain caused by the sovereign debt crisis, and remain far away from targeting the root causes of the currency area’s problems, economists have warned.

Politicians agreed last week to make plans for a “single supervisory mechanism” for Eurozone banks, probably run by the European Central Bank (ECB) – a key step towards creating a banking union, and a change which could allow the ESM bailout fund to recapitalise troubled banks directly.

Borrowing costs fell for the Spanish, Italian and Irish governments as the plans reduce their liability to bail out failing banks. A €120bn (£96.7bn) package to boost growth was also agreed.

However, the plan remains vague in parts and does not cover the main problems afflicting the Eurozone.

“Progress was made on the banking union,” said BNP Paribas economist Paul Mortimer-Lee.

“However, there was no mention of either a deposit guarantee scheme or a bank resolution authority, the other key aspects of a banking union.”

Barclays added that there was little progress on creating a fiscal or political union.

“This package of measures stops short of new decisive measures that would definitely mark a turning point,” said analyst Fabio Fois, who added that Germany will have to give real financial backing to weak governments before the crisis will end.

“Markets will also need some commitment that member states with high public debt levels could eventually receive further significant support from others.”

Meanwhile IHS Global Insight’s Howard Archer cast doubt on the effectiveness of the €120bn fiscal stimulus.

“This headline figure puts a highly positive gloss on what has been agreed given that some of the measures and funds are not really new,” he said, “and it will not markedly lift Eurozone growth prospects in the near term.”

WHAT WAS AGREED
■ The creation of a single bank supervisor for Eurozone banks, with the involvement of the ECB

■ The recapitalisation of weak banks using the European Stability Mechanism, avoiding adding to governments’ debt

■ ESM loans will not be senior to other debts, thus avoiding panicking private investors further

■ A €120bn stimulus to boost growth

WHAT WAS NOT AGREED
■ Other vital steps towards a banking union, including a deposit guarantee scheme or bank resolution authority

■ Eurobonds – German Chancellor Angela Merkel has made it clear she will not put German taxpayers’ cash behind other countries’ debts, and that did not change in the summit

■ Any steps to boost competitiveness of peripheral countries, or even major economies like France which have fallen behind powerhouse Germany

■ Full details of how the bailout funds will buy government bonds

■ On top of that, economists expressed concern that the ESM will not be big enough to buy government bonds and recapitalise banks