On Thursday, the eurozone leaders will hold an extraordinary summit for a second time in four months. The meeting is being convened by the President of the European Council, Herman Van Rompuy, and the main topics in the agenda are formulated as follows: “the financial stability of the euro area as a whole and the future financing of the Greek programme”. Under “the financial stability of the euro area as a whole” we are obviously to understand the growing fears that Italy and Spain could become the next “customers” of the euro area rescue fund, after the yield on their debt continued to grow in recent days.
Even the good performance of the banking systems, as a whole, of the two countries in the stress testing did not help the mistrust of part of the investors. The reason is the same as with the case of the bailout countries Greece, Ireland and Portugal, whose credit default swaps (CDSs) reached record prices - the lack of a clear and definite decision to tackle the debt crisis at a European level. This is what is expected of the eurozone summit, but at this stage it seems unlikely.
German Chancellor Angela Merkel was quick to declare that she would participate only if her colleagues were willing to take a final decision on the most pressing issue – participation of the private financial institutions in the second rescue programme for Greece. All recent meetings of the EU leaders and finance ministers on the issue showed that there is an agreement in principle the private sector to be involved in the rescue operation, even if this would provoke credit rating agencies to announce a “credit event” - partial insolvency of Greece for a short period of time.
However, the disputes circle around how exactly to involve the private sector, so as to achieve a significant reduction of the Greek debt. There is also an option to allow the euro area rescue fund (EFSF) to buy debt on the secondary markets or to borrow money to Greece to buy back part of its debt, but this is not exactly the kind of private sector participation demanded by some member states, especially Germany and the Netherlands, who insisted on losses sharing.
The European Central Bank remains the most serious opponent of the idea for Greek debt restructuring even at the cost of a default. ECB President Jean-Claude Trichet is firm that in case of a Greek default the ECB will not accept Greek bonds as collateral in order to provide financing to the banks in the country.
In an article published in the Foreign Affairs, Lorenzo Bini Smaghi, a member of the Executive Board of the European Central Bank, recalls the ECB's opposition to the restructuring of Greek debt: “Most of Greece’s debt is held within the country by a few private banks. They could never shoulder a debt write-down and would collapse. In the end, the EU would have to bailout both the banks and the Greek economy - a much more expensive proposition. In spite of these higher costs, policymakers in several countries believe that the only way they can get domestic support for the Greek bailout is if banks are seen as paying part of the bill.”
An even bigger problem, according to Mr Smaghi, is that individual Member States are not really united in terms of the conditions they set for the second Greek bailout: “While Germany demands that Greek banks accept losses, for example, Finland has requested collateral in exchange for providing aid. Such different approaches among members paralysed the EU’s efforts to address the crisis.” To overcome this “paralysis” Lorenzo Bini Smaghi proposes a change of the rules of decision-making in the rescue fund for the euro area (European Financial Stability Facility, EFSF), such that would allow the decisions on the rescue loans to be taken by a qualified majority as in the IMF, rather than by unanimity as at present. The eurozone as a whole needs stronger enforcement mechanisms, including more power for EU's economic and monetary affairs commissioner, Mr Smaghi states.
Another important instrument for strengthening the discipline at the national level, he believes, is the package on EU's economic governance, which, however, “does not go far enough”, so Mr Smaghi hopes the European Parliament to succeed in the negotiations with the Council. (More about the so-called “Six-pack” read here and about the controversial points between the Parliament and the Council - here) Mr Smaghi suggests member states not only to introduce national debt ceilings, but to provide the EU with the responsibility to issue public debt in the eurozone. So “member states would no longer have the ability to issue debt to cover expenses over the limit.”
An important clarification is that “this is not the same as issuing bonds on behalf of the whole EU in the form of Eurobonds,” because that means the eurozone to have a federal system of taxation and revenue transfers. What Mr Smaghi proposes is the responsibility for the debt to remain national, but the decision on the total amount of debt allowed for each country to be taken at the European level and to be binding. “It is time to turn the monetary union into a stronger political union,” Mr Smaghi concludes.
For a similar approach called Lawrence Summers, a university professor and Treasury Secretary under US President Bill Clinton. In an article for The Financial Times, Mr Summers notes: “The European Central Bank is right in its concern that punishing creditors for the sake of teaching lessons or building political support is reckless in a system that depends on confidence.” According to him, in times of a crisis it is essential to maintain the systemic confidence. Therefore, the EU's response must be systemic and involve several steps. The starting point, Mr Summers says, is that Greece, Ireland and Portugal need debt relief and at the same time, the creditors have only limited capacity to take immediate losses. The European authorities should “recognise that the failure of any European economy is unacceptable”.
According to Lawrence Summers, the countries with bailout programmes should receive a reduction of the interest rates on their loans. Countries, whose borrowing rate exceeds a certain threshold value, should not pay contributions to the rescue fund. Countries leading sound policies should be permitted to buy European guarantees on new debt issuances at a reasonable price, payable on a deferred basis. Also, “there must be a clear commitment that, whatever else happens, no big financial institution in any country will be allowed to fail”.
These measures, Mr Summers admits, will not help to contain the storm, but will reduce payments for debtor states, will protect the countries from the lack of market confidence and allow the ECB to continue to support the stability of European banks. As regards private creditors, there are many options that should be assessed for each country separately, but this is not a crucial issue. “The next few weeks may be the most important in the history of the EU,” Lawrence Summers says.
He is certainly right. But this has been repeated many times in the last year (since last May, when the first rescue programme for Greece was urgently agreed), and all important decisions proved to be insufficient and reactive instead of proactive. Surely there are no simple answers and certainly no easy way out, but it is unclear even whether there is a right decision. However, one thing is certain - each summit, either secret or official, without concrete results, only worsens the situation. The uncertainty grows, together with the pressure on the indebted European economies.
What the European leaders must admit to their taxpayers is, yes, we made mistakes and yes, we are trying to prevent them in the future, but given the situation, now we will all pay for them altogether. The “rescued” countries, in turn, must demonstrate that European taxpayers' money is not pumped into a bottomless pit. And the citizens must realise that EU membership brings aside from benefits, responsibilities too. Yes, sometimes they are unfairly distributed, but this is a team play. The citizens are not children who should always be juggled, bribed and comforted. It's time for them to stop waiting for such an attitude from politicians who, in turn, should stop buying power with cheap promises. The crisis of adolescence is over and it is time for all of us to grow up.