The European Summit today and tomorrow in Brussels is the latest in a series of make-or-break moments for the European project. On many occasions since May 2010, when Greece was first cut off from market access, European leaders have been called upon to make a bold leap forward in the policy integration of the Eurozone—the only way to convince investors of the iron irrevocability of the common currency. Under constant pressure from the ongoing crisis, they have often seemed to be making the big decisions to reform the flawed architecture of the monetary union, only for initial perceptions to give way to a much more underwhelming reality. Markets have grown increasingly savvy and cynical in interpreting summit communiqués. They know that behind grand words and large headline numbers, the political will to come together has yet to be demonstrated. Is this summit meeting—in the week when Cyprus became the fourth Eurozone member to ask for an official rescue and Spain confirmed that it would need 100 billion euros to shore up its banks—going to change all that?
The odds are not good. France and the big countries of the South (Italy and Spain) want Germany to commit to a banking union—a European fund that can be used to recapitalize ailing banks all across the EU and to offer deposit insurance to bank customers irrespective of their institution’s nationality. This, it is argued, will break the destructive death-grip linking troubled banks and over-indebted sovereigns and arrest the dangerous flight of deposits from the credit institutions of the South, in particular of Greece and Spain. The alliance of the South also wants to take steps toward pooling the debt of Eurozone members, the ultimate aim of which would be the issuing of eurobonds. The aim is to reduce the borrowing costs of the Spanish and Italian governments, now hovering over 7 percent and 6 percent respectively for 10-year bonds. While there are a number of variations, the main proposal is for the European rescue funds—the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which goes into effect in July—to buy Spanish and Italian bonds and thus hold interest rates down to manageable levels. Otherwise, both countries are directly threatened with a loss of market access, and the rescue funds are not even close to having the money necessary to cover their borrowing needs. (Italy is the third largest economy in the Eurozone, and Spain is the fourth largest; their combined total debt outstanding exceeds 2.5 trillion euros.)
Germany, along with its allies in the European North, objects. Speaking yesterday in the Bundestag, the German parliament, Chancellor Angela Merkel repeated for the umpteenth time her position that her country does not have infinite resources and that it cannot take on unlimited obligations without a corresponding strengthening of control and enforcement mechanisms to ensure good behavior from the beneficiaries, be they banks or sovereigns. “Control and liability must not be placed in false relationship to each other,” she said. “Control and liability must go hand in hand, and shared liability cannot occur until sufficient control has been assured.”
In practice, this means that for Berlin, a banking union entails a common European banking authority with the power to intervene in national markets, even against the wishes of the national government in question. Fiscal integration, according to the Germans, requires a deeper “political union”—i.e., greater centralized control of national budgets. On both these fronts, Berlin is correct. The rest of the Eurozone, not least the French, needs to make concrete commitments to abandon aspects of sovereign jurisdiction in order to enjoy the benefits of pan-European guarantees for deposits and government debt.
But Merkel’s insistence that no ground will be ceded until she is satisfied that she can control the policies of those who will benefit, as well as the kind of control she wants to impose—punitive austerity, too little stimulus—is leading Europe to catastrophe. She keeps repeating that a banking union and eurobonds can only come once the hard work of spending cuts and structural reforms is complete. But by then, it will be too late.
What to expect, then, from the summit? Some agreement to deal with the immediate crisis in Italy and Spain, for one thing. According to high-ranking German government sources, “A sustained lowering of borrowing costs will be the result of structural reforms, budget consolidation and improvements in the way Europe works together. Europe has created instruments that can help countries cope with the situation, the EFSF at present and the ESM in the near future. They have been created with great effort, political and financial; they can be used, too.” The question is how they will be used—and what Berlin will demand in return.
On the equally pressing matter of Europe’s banking woes, the same sources note: “The chancellor has publicly said that Germany supports a credible and independent European supervision of banks and that the ECB would be suited for that task. We will be working toward that goal at the EU council.” That is all well and good but far from enough to stem the crisis of confidence in the institutions of some of Europe’s weaker states.
Speaking in the Italian parliament on Wednesday, Prime Minister Mario Monti proposed that EU leaders stay locked up together however long it takes to find a solution. Some Italian analysts were predicting that the summit would last until Sunday night, so that there could be something substantial to show the markets on Monday. Europe’s politicians must take heed: This time, a nicely packaged fudge won’t do. They need to come up with the goods.