For more than two years, Europe’s 17-nation euro currency bloc has grappled with containing its burgeoning governmental debt crisis. Its leaders often took half-steps they thought surely would calm international financial markets worried about the fate of the euro and solve the financial problems of the latest country that was strangled in debts of its own making.
And then the eurozone financial chieftains and heads of state would return to yet another summit weeks or months later and try to resolve the crisis once more when their earlier actions proved to be insufficient.
With that history in the books, Europe’s leaders tried again in Brussels this week. This time, they took what some believe are more decisive measures to quell the immediate surge in borrowing costs for Italy and Spain, the eurozone’s third and fourth largest economies. But they also set the currency bloc on a path toward a more unified monetary union, rather than just a collection of countries that happen to use the euro.
Stock markets across the world cheered Friday, with indexes up sharply. Interest rates on Italy’s and Spain’s bonds dropped from the levels that have forced Greece, Ireland and Portugal to secure international bailouts in the last two years.
Europe’s leaders applauded their collective actions, and in Washington, the White House said it welcomed the news as well. But whether it is enough to finally turn the corner on the crisis, no one was quite sure, what with numerous details to work out on defining just how centralized control of banking in the eurozone would work and what would be the shape of the “genuine monetary union” eurozone leaders said they want to create.
British Prime Minister David Cameron, whose country is outside the currency union but deeply affected by its economic performance, said he thought the steps taken are substantial, yet acknowledged that much more work is ahead.
“If you want a single currency to succeed you need institutions that absolutely stand behind it,” said Cameron. “In Britain you have the Bank of England standing behind the currency, doing what is necessary to safeguard the financial system, you need that in Europe too. I think last night was significant, but I have been to enough of these summits to know that Rome, Europe, none of these things was built in a day, there will be other steps that are required.”
European leaders have heightened their calls for Germany, the eurozone’s most potent economic force, to do more to help its economically weaker neighbors, but Merkel and her countrymen have been reluctant to take on the financial burdens of other countries that have not adhered to the financial restraints that Germany favors.
Cameron was sympathetic to his German counterpart’s predicament.
“Angela Merkel is being asked to do some things that are difficult for her to deliver,” Cameron added. “The German people have worked incredibly hard to make their economy competitive, to pay down their debts, to do all of the right things and it is all very difficult when they are then asked to do even more to support countries that might not have done all of those things.”
In agreeing to the latest eurozone efforts, Merkel sought to assure Germans that she had not given into unfavorable commitments.
Spanish premier Mariano Rajoy voiced a note of uncertainty about the outcome, even while saying he thinks the summit’s decisions will prove to be advantageous.
As for the details, the European leaders agreed to use the euro currency bloc’s bailout fund to directly boost the continent’s struggling banks, a move sought by Italy and Spain.
Under the new plan, the eurozone decided it could send loans to distressed banks directly, rather than through national governments, as has been the practice. The move was designed to keep the bank loans off the governments’ mounting list of debts, such as a $125 billion rescue Spain is seeking for its banks, and make the financial institutions responsible for repaying their debts.
Borrowing costs for Italy and Spain, the 17-nation eurozone’s third and fourth largest economies, had surged in recent days, especially for Madrid. But after the EU altered its lending plan, interest rates for Italian and Spanish bonds both dropped.
The EU summit also agreed to create a single supervisor to oversee the eurozone’s banks by the end of 2012. Greater financial integration in the eurozone could eventually lead to tighter central control of spending by the 17 governments, which has been sought by Germany, and the sale of eurobonds, debt supported by the entire currency union.
Some European countries view the sale of eurobonds as a path to lower borrowing costs for weaker governments, but Berlin fears its low borrowing costs would increase.
The EU leaders also agreed to set aside about $150 billion to stimulate growth in the bloc’s weakest economies. The so-called “growth pact” was initially rejected by Spain and Italy, who held out until they won agreement on their demands.
French President Francois Hollande concluded that the summit’s actions would prove successful both in the short term and in the future.