Post-Summit Briefing

5 March 2012

“Last week’s summit was unspectacular. This is a sign of progress, but it’s also dangerous. Leaders were keen to send out signals that we’re moving from ‘crisis’ to ‘normal’ mode. But there’s an urgent need to boost growth,” said Janis A. Emmanouilidis, senior policy analyst at the European Policy Centre.

“The crisis is moving from a ‘hot’ to a ‘cold’ phase. The European Central Bank’s (ECB) huge loans to banks have cushioned the liquidity squeeze and calmed the markets. But that will only buy us time,” Emmanouilidis said.

“Member states are exhausted. Solidarity has its limits. There are uncertainties in Greece, especially regarding a write-down of debt. It is also uncertain whether member states will continue along the path of austerity and reform,” he cautioned.

He also expressed concern that deficit reduction targets may be softened in many countries, warning against the risks of “collective fatigue” and “complacency”.

“Governments risk running out of steam while the structural ingredients of the crisis are still there. Populism is rising, and there’s a danger of political confrontation. This may lead to more severe political ruptures between member states,” the EPC analyst warned.

“The summit attempted to move from crisis to growth mode, which is a positive development. Leaders were nevertheless eager to send a signal that fiscal consolidation is still important, at Germany’s behest. But a growing number of member states are seeing that with so much austerity, there can be no growth,” Emmanouilidis said.

“The gap between countries’ stances here is widening,” he added.

Measurable commitments must to be added to the European Semester, he argued, complaining that it currently suffered from “a lack of ownership and ambition on the part of member states, and not enough coercion”.

One positive development was the agreement reached on the ‘Fiscal Compact’, he argued.

“It’s too early to offer a final judgement of the Fiscal Compact, but it has already added value by giving Germany and the ECB leeway to defend additional bailouts,” Emmanouilidis argued.

“This summit was about the message. Leaders wanted to send a ‘back to normalcy’ message. That’s why the summit was quite short. But I agree that this was dangerous,” said Peter Spiegel, Brussels bureau chief at the Financial Times.

“There’s a risk of being lulled into a false sense of security due to the ECB pumping liquidity into the system,” Spiegel said, warning that French President Nicolas Sarkozy and even German Chancellor Angela Merkel had seemed “a bit too upbeat” at the summit’s conclusion.

He claimed that ECB chief Mario Draghi had privately seemed very pessimistic during the summit.

“The situation in Portugal is dire. Portugal brings with it the risk of contagion. It will hang over us for some time, unless we make quick decisions,” Spiegel warned, asking: “Will we see private-sector involvement (PSI) and debt restructuring right now?”

“Spain is moving into deep recession. It has unemployment of 22-25%, youth unemployment of 50%, an un-deleveraged banking system and a housing bubble that isn’t coming down yet. When it does, Spain will need a huge bailout: maybe within 3-6 months,” he said.

“The acute crisis is easing, but the long-term crisis lives on and won’t be resolved by one summit,” said Fabian Zuleeg, chief economist at the European Policy Centre.

“The ECB has bought us time. The agreement on Greece is positive. We now need to see enough private bondholders sign up,” Zuleeg said.

“The Monti bounce has been phenomenal. There’s something real there. Italy is back in the fold. Monti comes out of summits alongside Merkel and Sarkozy,” he added.

“Politicians and markets don’t seem to react to credit rating agencies any more. That’s positive. Germany is also more willing to look for comprehensive European solutions,” Zuleeg said.

“But there’s still uncertainty. Things can go wrong in the markets very, very quickly,” he warned.