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All eyes are on the latest EU summit taking place in Brussels starting today, after weeks of speculation about the distance new measures could go towards repairing the fundamental flaws of the eurozone.Expectations that we’ll see major progress towards a crisis solution have been tempered lately, with the latest headlines out of Germany suggesting that we may see no progress at all.
That said, it appears clear that we’ll see continued movement towards fiscal union in the eurozone, despite Germany’s political posturing ahead of the meeting. The big question remains: will this progress be sufficient?
Four issues we’ll be focusing on today and tomorrow at the summit:
Bond market interventions: Both the Italian and Spanish government have been pressuring other European leaders to intervene in bond markets to reduce the high borrowing costs both are currently paying to finance their debts. The European Financial Stability Facility bailout fund (and/or its successor, the European Stability Mechanism) could technically begin purchasing government bonds in the secondary markets, as the European Central Bank did in its Securities Markets Programme last year. However, it is unclear if EU leaders are willing to begin such purchases, given that they would require countries to make good on what are only currently financial commitments and the fact that the ECB’s SMP program had little long-term effect.
Burden-sharing: Calls for eurobonds or deposit-guarantee insurance to stabilise investments in European governments and banks have constituted some of the most sweeping calls for change in the structure of the euro area, but they have been repeatedly rebuffed by Germany (most recently this morning). Even so, some investors continue to hope that Germany will give into pressure and allow some kind of burden sharing beyond the European bailout funds as the financial system deteriorates in Europe.
Bank recapitalizations: The European banking sector has come under severe fire in the last few months, as investors pull their money out of banks in Greece, Spain, and Italy. Plans to stabilise the sector will be at the top of EU leaders’ list of to do’s, but it is unclear how they will actually go about stabilizing the system beyond the already announced Spanish bank bailout.
Spain’s bank bailout: We should finally get more details about the terms of a €100 billion ($124 billion) plan to bail out Spain’s banks. The plan was meant to distinguish the Spanish banking sector from the Spanish government in the eyes of investors, and the most important piece of this looking forward concerns whether or not private investors will be subordinated to public funds. rumours earlier this week suggested that EU leaders could eliminate clauses that would explicitly subordinate private sector government bondholders, but whether or not those rumours are based in fact remains unclear.