After Italy and Spain play hardball, Europe is a step closer to issuing eurobonds

At an overnight EU summit on the debt crisis, Monti and Rajoy face Germany down, securing direct access to bailout funds for struggling banks.

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It’s been a good week for Spain and Italy. With both nations through to the final of Euro 2012, they proceeded last night to secure advantageous terms on bank recapitalisation and financial oversight at an overnight Brussels summit on the eurozone debt crisis.

The Guardian reports:

“Amid bad-tempered talks that continued through the night, Italy and Spain stunned the Germans by blocking progress on an overall deal at a two-day EU summit in Brussels until they obtained guarantees that the eurozone would act to cut the soaring costs of their borrowing.

After 14 hours of wrangling, they emerged with a three-point statement rewriting the rules for the eurozone’s new bailout regime in a way likely to soften the draconian terms that have accompanied the rescue programmes for Greece, Portugal, and Ireland over the past two years.

The leaders said a new eurozone banking supervisory system should be established by the end of the year. Once it is operational, the eurozone’s new permanent bailout fund, the European Stability Mechanism, would be able to recapitalise failing banks directly, without the loans going via governments as at present and adding to national debt burdens.”

The latter point, the Guardian notes, was a particular priority for Mariano Rajoy, the Spanish prime minister. As Left Foot Forward pointed out last week, the current bailout arrangement for Spain is far from ideal: taking the form of a collective eurozone loan to the Spanish government, it stands to drive up public debt yet further.

The Italians’ victory – securing a hypothetical bailout free of a top-down austerity programme a la Greece –  is arguably less significant. The Spanish, under the conservative, pro-austerity government of Mariano Rajoy, were already clear on this point: “Given the strong commitment by M. Rajoy’s government to fiscal discipline“, one economist recently told the Guardian, “the need for fiscal monitoring was less prevalent.”

Last night, the Italian delegation argued that, although both countries continued to face unaffordable borrowing costs (Spanish bond yields hit the ‘psychologically significant’ 7% mark three weeks ago), their governments had nonetheless made significant progress towards fiscal discipline – a point echoed in the early hours of the morning by Hermann van Rompuy, the chairman of the European Council who oversaw last night’s discussions:

We are opening the possibilities for countries that are well-behaving to make use of financial stability instruments, the EFSF and ESM, in order to reassure markets and get again some stability around some of the sovereign bonds of our member states.”

See also:

Hollande and Merkel move closer – but remain divided on solution to euro crisis 29 June 2012

The Spanish banking crisis: Europe between a rock and a hard place 25 June 2012

Europe’s right still full-steam ahead on mad dash for austerity 16 May 2012

Krugman: “Keynesians have been completely right, Austerians utterly wrong” 26 April 2012

Krugman savages the “austerity debacle” 30 January 2012

As such, the austerity narrative remains dominant: European institutions are able to offer Spain and Italy more forgiving bailout agreements because Mariano Rajoy and Mario Monti’s governments are already committed to slashing public spending.

Nonetheless, this morning’s deal is significant. The new supervisory system for European banks will come under the aegis of the European Central Bank. Since it entails the eurozone as a whole guaranteeing savers’ deposits and collectively shouldering the burden of recapitalising failing banks, it represents a major concession on Germany’s part.

Before this week’s summit, Angela Merkel ruled out eurobonds ‘for as long as I live’. Today, she’s undeniably moved a step closer to them.


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