Successful blackmail

It was a rather odd connection: Spain and Italy said they would only agree to the proposed EU growth pact, if in return they got help to lower the horrendously high interest rates for their borrowing costs.

Put another way: The two problem countries, which would benefit most from the growth pact, blackmailed German Chancellor Angela Merkel, threatening to reject aid designed specifically for them if they did not get support in another area.

The two premiers, Mariano Rajoy and Mario Monti, knew how much leverage they had in their hands because their problems are also the problems of everybody else in the eurozone. If Spain, and especially Italy, went bankrupt that would be the end of the euro.

A single sentence with fatal repercussions

The calculation paid off: Merkel buckled on several important points. The growing isolation of the chancellor was also a contributing factor. More than anything, the new French president, Francois Hollande, had been pursuing a crisis strategy that was openly against Merkel: Unconditional debt liability shouldered by the strong economies without any loss of budget sovereignty for the weak economies. Hollande could be sure of the enthusiasm of the southern EU countries.

Merkel, however, unnecessarily magnified her isolation. Her alleged comment to the parliamentary group of her Free Democrat junior coalition partner earlier this week that there would be no mutualized liability of debt among EU countries "as long as she lived" was so categorical that it showed she does not believe in a political and economic union. So it came as no surprise that there was little sympathy for her in Brussels.

Lower threshold

But how big are Merkel's concessions really? And will the agreements solve the problems? There is plenty of room for doubt. The ESM rescue fund can now bail out EU banks directly without going through the respective home country of a bank. This prevents rescue funds for a bank from becoming an additional debt burden for the respective home country. But an EU-wide banking oversight authority is supposed to be created first, which would supervise and control banking activities. This, or course, makes sense, except that it will take quite some time to set up such an authority; time that Spain and its wobbly banks do not have. It is also not clear how strict the conditions will be for these banks which, in turn, will undoubtedly lead to more pressure not to be all too strict with these banks.

A further point is that the rescue fund, in future, will be allowed to purchase government bonds from countries which, despite good budget discipline, are suffering from high interest rates – and this without additional austerity measures. We will have to wait and see if the threshold for these slips dangerously low. These measures point to a further mutualization of risk.

Stamping out the brush fires

In more than two years of crisis management the EU has resorted to little more than stamping out the brush fires. Fighting the root causes of the blaze – namely, the competitive weaknesses of many eurozone countries in conjunction with negligent budget policies – has always come up short. Thursday's EU summit was no different. And since the fundamental problems still exist, financial markets have only briefly honored the countless summit resolutions in the past. We should be worried that the relief this time may also be short-lived.

Author: Bernd Riegert /gb
Editor: Jessie Wingard