NEWS,29.06.2012

European leaders' breakthrough defied expectations

Europe's leaders finally rose to the challenge of a debt crisis that has hobbled economic growth and threatened the global financial system.Markets roared their approval after leaders of the 27 European Union countries backed bold ideas to help weak countries cope with rising debt levels and frail banks.For the first time in 19 summits since the start of the crisis, the EU leaders defied low expectations Friday by announcing plans to:

—    Bail out banks, without putting any financial burden on strapped governments.

—    Ease borrowing costs on Italy and Spain, the euro region's third and fourth largest economies.

—    Seek stronger, centralized regulation to European banks.

—    Rescue floundering countries, without forcing them to make painful budget cuts if they've already made economic reforms.

—    Tie their budgets, currency and governments more tightly.

Europe's leaders trumpeted the agreement. The prime minister of Ireland  one of the five euro countries that has required emergency funds  said the plans marked a "seismic shift in European policy." British Prime Minister David Cameron said that "for the first time in some time we have actually seen steps ... to get ahead of the game."The Dow Jones industrial average recorded one of its biggest gains of the year, and stocks advanced even further in Europe  in strong and weak countries alike. The benchmark stock index in Germany rose 4.3 percent, by far its best performance this year. Germany has the healthiest economy in Europe, and a warm reaction there was a crucial sign of approval for the plan. Prices for oil and other commodities shot higher.The decisions made at the European Union summit in Brussels won't end the crisis that has gripped Europe for nearly three years. Plenty of questions remain about how the bank bailouts would work, whether there's enough money committed to rescue banks and governments and whether impoverished, indebted Greece will be forced out of the euro club.But for EU leaders who have consistently underwhelmed their exasperated publics and nervous financial markets, Friday's plans marked a breakthrough.At first it looked like the summit would produce little more than a modest plan to stimulate growth in Europe. But Italy and Spain, whose borrowing costs have soared to dangerous levels, refused to sign off on a $150 billion spending plan unless something was done to ease their financial burdens.So the leaders signaled a willingness to expand the use of Europe's two rescue funds. The money could be used to buy bonds to drive down a country's borrowing costs. Or it could be loaned directly to troubled banks, which would EU leaders said would help break "the vicious cycle" in which weak banks and weak governments threaten to drag each other down.Before the summit, European leaders insisted that bailout funds be used only to rescue governments  like Ireland, Portugal and Greece. If money was going to be used for banks, it had to first go to a government, which then funneled it to the troubled banks. But that added to the debt on a government's books because it was responsible for repaying the money.So efforts to help the banks ended up raising fears about governments. That is why Spain's borrowing costs rose dramatically after the eurozone countries agreed to lend it $125 billion to rescue its banks.The EU plans also call for a single regulator probably the European Central Bank to oversee Europe's banks. Currently, banks are regulated by their national governments such as Spain's, which have been slow to recognize loan problems and shut down the worst banks.As part of a broad "banking union" the new regulator will likely get power to close failing banks if their national regulators won't do it. The plan is also expected to include deposit insurance across Europe. Individual European countries now insure bank deposits within their borders. But bank failures could overwhelm those national funds.The bank overhaul is supposed to be completed by the end of the year.The leaders said they were committed to linking their countries closer together economically and politically. But they put off the hard work of closer integration, which is likely to require countries to give up some of their taxing and spending powers to a European budget authority.Most analysts cheered the EU plans but worried about the questions left unanswered. And they said the bailout funds are too small to handle the tasks that could be thrown at them.Europe's two bailout funds have a combined $625 billion in lending power; up to $125 billion of that is already committed to helping Spain bail out its banks. The remaining $500 billion looks small compared to $3.1 trillion in Spanish and Italian bonds outstanding.The solution hovering in the background, say some economists, is the European Central Bank. The ECB could buy any necessary amount of government bonds, backed if need be by the bank's theoretically limitless power to create new money. So far the bank has been unwilling to take this step, which could risk running afoul of its mandate to fight inflation and a ban on central bank financing governments. The ECB's next policy meeting is Thursday in Frankfurt.The summit deal leaves out crucial details of just how any bank bailouts would work. Would bank creditors have to take a loss on their investments, or would taxpayers foot the whole bill? The deal didn't specify.If the banking regulator and a rescue fund take ownership stakes in failed banks, manage those stakes in the taxpayer interest while forcing losses on shareholders and creditors, it could be positive, said Clemens Fuest, an expert in public finance at Oxford University's Said Business School.Otherwise, simply charging taxpayers could be "a huge burden on growth in Europe for a very long time," Clemens said.

German lawmakers OKs fiscal pact, euro fund

German lawmakers on Friday approved Europe's new budget-discipline pact as well as the eurozone's permanent €500 billion ($623 billion) rescue fund, hours after Chancellor Angela Merkel defended concessions she made to financially troubled European nations at a summit.A solid majority of more than two-thirds of all lawmakers of Parliament's lower house endorsed the two sets of legislations in a late night session, following urgent calls by Merkel to back the projects deemed crucial to stabilizing the 17-nation currency zone.Merkel said supporting the fiscal pact and rescue fund sent "a signal of unity and determination, domestically and abroad; a signal toward overcoming the European government debt crisis sustainably, and a signal that for us Europe means our future.""With these agreements, we are taking irreversible steps toward a sustainable stability union," she said.The plans had support from Germany's two main opposition parties. A two-thirds majority was needed for the fiscal pact because it involves an internationally binding commitment to keep Germany's deficit low.Parliament's upper house, which represents Germany's 16 states, is expected to approve both plans later in the evening, but its approval doesn't mean that the legislation will take effect immediately.Germany's Federal Constitutional Court has asked President Joachim Gauck not to sign it into law immediately after Friday's parliamentary votes so that it has time to decide on expected calls for injunctions blocking the legislation. A decision could take as much as a few weeks.Lawmakers voted 491-111 Friday with six abstentions to back the discipline pact  the so-called fiscal compact to which 25 of the European Union's 27 members have signed up.Lawmakers also voted 493-106 in favor of the rescue fund, the European Stability Mechanism, with five abstentions.The fund is meant to be operational next month, which required lawmakers to pass the legislation at the latest on Friday. Germany must pay about €22 billion in capital to underwrite the fund, and it guarantees about a third of its lending capacity.Merkel noted that, in the future, countries will have to implement the fiscal pact to be eligible for aid from the ESM. "There is a legal link between solidity and solidarity, and I consider that very important," she said.In her speech a few hours after returning from the summit in Brussels, Merkel defended concessions she had made there. She assured lawmakers that help to struggling countries and banks will still come with strings attached and insisted that some decisions were misunderstood.Merkel had been opposed, at least in the near term, to some of the measures that she and the other 16 leaders of the euro countries agreed upon Friday. They include allowing Europe's bailout fund in the future to give money directly to a country's banks, without imposing strict austerity conditions on the government.German media headlines immediately after the summit portrayed the outcome as a political defeat, but Merkel said her tough-love approach was intact.Merkel told Parliament it was a "sensible decision" to allow countries that pledge to implement reforms demanded by the EU's executive Commission to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece, Portugal and Ireland. It was a concession to Italy and Spain in particular.Merkel insisted it was only about helping countries whose financial stability is threatened by high interest rates but don't need to be taken off markets all together.She said there will always be conditions and a time frame, which will be supervised, and told lawmakers they should read the EU Commission's current economic policy recommendations for Italyand Spain  "they are tough conditions.Heading in to the Thursday-Friday summit in Brussels, Merkel had appeared thoroughly uncompromising  insisting on the importance of getting budgets in order and improving eurozone strugglers' competitiveness while brushing aside talk of shared debt liability in Europe.But in a victory for Spain and Italy, she agreed that funds set up to bail out indebted governments could be allowed to funnel money directly to stressed banks, once an "effective single supervisory mechanism" for banks is set up.Merkel said that it was a matter of "several months or perhaps a year" but that having an effective supervisor that could set and enforce conditions "changes the conditions for the question of how we can deal with banks in the eurozone."