Reports 2011

Post-Summit Briefing

27 October 2011

“It’s enormously difficult to assess the outcome of this week’s summits this early. The package agreed is complex and many key details must still be thrashed out,” warned Janis A. Emmanouilidis, a policy analyst at the European Policy Centre.

Nevertheless, this week’s summit marathon has shown EU leaders to be “more determined than ever” to take bold decisions and get ahead of the curve, which wasn’t the case six months ago, the analyst said. “The political will to go much further is now there,” Emmanouilidis said.

An agreement to restructure Greek debt will see the private sector take a 50% voluntary haircut. “PSI 2” will be much bigger than the July 21 deal: that much is certain, he said. “It should give Greece some time to breathe, but we don’t know how many banks will participate. 90% agreed to take part in the July 21 deal, but the conditions for banks are worse this time,” he warned.

Leaders appear to have agreed to boost the firepower of the European Financial Stability Facility (EFSF) to the tune of €1 trillion, the analyst said.

There are two basic options for leveraging the EFSF’s resources, he explained:  the first foresees the provision of credit enhancement to new debt issued by euro countries, a kind of insurance scheme guaranteeing a certain percentage (probably around 20-25 per cent) of fresh debt issues by countries in danger.

The second option involves the establishment of one or more special-purpose vehicles able to attract additional liquidity from private and public financial institutions and investors. In addition, the euro zone will consider how to further enhance the EFSF by cooperating more closely with the IMF, thereby finding new means to attract non-European capital.

Recapitalisation will require banks to seek capital increases worth a combined total of €108 billion, according to EU estimates. But it remains to be seen whether this figure will be enough, Emmanouilidis said.

On the institutional side, there are clear limits to what can be achieved under the Lisbon Treaty, and the summit conclusions mention “limited treaty change”. But further details are lacking. What is clear is that ‘Euro Summits’ of the EU 17 will take place more often – at least twice a year – and Greece will be subjected to permanent monitoring by the rest of the EU.

“This week’s agreement is very ‘European’ in that it’s neither good nor bad, said Marco Zatterin, European editor at Italian newspaper La Stampa.

Europe now has new tools that it didn’t have before, like a monitoring mechanism for Greece and a bigger EFSF, “but we’ll still need more late-night summits,” he predicted.

Europe is moving in the right direction: “sometimes we underestimate how difficult it is for EU leaders to reach agreement,” Zatterin said. Given the extraordinarily complex nature of the crisis, this week’s deal is “a good one,” he added.

Regarding the uncertain future of his native Italy, Zatterin insisted that the deficit was under control. Debt is so high in relation to GNP due to structural problems, but private debt is still lower than in Germany, the UK or Belgium, he claimed.

Italy has a credibility problem because there is huge distrust in the Italian government. Unless Rome delivers on its promises and respects the timeframe for doing so, the whole of Europe is in trouble, Zatterin warned.

The key difference between Italy and other countries in trouble like Spain is that “[Spanish Prime Minister José Luis Rodríguez] Zapatero actually has a plan and is implementing it,” he said.

“Many positives have merged from the summit. Bank recapitalisation was urgent, as were boosting the EFSF and agreeing a Greek haircut. So we got answers and a deal was there. I dread to think what the markets would have done without it,” said Fabian Zuleeg, chief economist at the European Policy Centre.

Another cause for optimism is that Italy actually committed to taking decisive action, “despite all the scepticism surrounding Berlusconi,” Zuleeg said, explaining that the summit conclusions make quite clear that Italy won’t get away with failing to act.

He stressed the importance of treating Greece as a special case, because without taking extraordinary action there, the contagion could easily spread to other countries too.

Zuleeg also expressed optimism that the European Central Bank would take on a greater role in resolving the crisis once Mario Draghi had taken over as president.

Nevertheless, he also sounded a note of caution. “We’re a long way from solving the crisis yet. Implementation will be crucial and must take place in the next few months,” he said.

Leaders are moving in the right direction by reforming governance, but Europe still needs a more stable banking system and must start to boost growth if it is to overcome the crisis for good, he said.