Markets are soaring after European leaders decided to use European bailout funds to directly recapitalize troubled banks.They also enacted two smaller measures—an important alteration to the Spanish bank bailout that will encourage investors not to be scared of it and €120 billion in funds devoted to growth.
Regardless of whether or not investors feel that EU leaders have done enough to adequately address growing concerns about the sustainability of Europe’s economy, they have made one major change to their crisis response tactics with this EU summit: they have finally addressed short-term concerns about the shaky European economy.
At previous summits in the last year, EU leaders have talked about long-term measures that might help Europe survive way down the road, at this summit they finally admitted that Europe is on the edge of disaster.
Bank recapitalizations, nonetheless use the European bailout funds—the European Financial Stability Facility and the coming European Stability Mechanism—as they were meant to be used: for directly recapitalizing banks. That is something that EU leaders—in particular, German Chancellor Angela Merkel—have resisted doing in the past, shying away from further bailouts for Southern Europe.
The plan is already depressing borrowing costs for the troubled Spain and Italy by supporting their governments’ primary creditors, and it promises to relieve funding pressure for banks. Admittedly, such plans are in a way counterproductive as they don’t adequately fix the fundamental problems of the EU financial system. Nonetheless, the imminent establishment of a stronger European bank regulator is an important step towards breaking the feedback loop between banks and sovereigns.
Last but not least, the time frame for implementation of this plan is ambitious by European standards, as EU leaders hope to kick in bank recapitalizations by the end of 2012.
In contrast, the fiscal compact EU leaders enacted late last year was an important step towards creating a financially stable monetary union in the long-term, but in the short term it did little but assure investors that austerity would continue.
Clearly, EU leaders are nowhere close to fixing the problems of the eurozone, and these measures are at best a temporary fix. That said, EU leaders have finally done something significant in the short term without waiting for help from the European Central Bank. This is something to be thankful for.
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