Debt solution likely to prove elusive at latest EU leader summit

Thu, Oct 18, 2012, 01:00

EUROPEAN DIARY:THE EU won the Nobel Peace Prize last week. If the euro zone is to overcome the debt saga, the union may need to win a Nobel award for alchemy first.

As these things go, the two-day summit beginning this evening in Brussels is unlikely to be a whopper. With clarity still lacking over the next move for Spain and Greece, there is little anticipation that the gathering will deliver a decisive step forward.

“There’s been a deliberate attempt to make sure that expectations are not too high here,” said a senior diplomat.

This means Taoiseach Enda Kenny will have to wait another day for any deal to ease the burden of the banking debt.

With Germany set to enter election mode in the new year, in question now is whether any appreciable progress can be made before then. It is a given at this point that Chancellor Angela Merkel’s scope will narrow all the time until polling day next September.

If that seems like a frightfully long time to wait, the lady in Berlin is no mood to rush. Events may conspire to force movement but there can be no certainty of that.

Still, the expectation remains that Spain will seek a new aid programme for its banks in the coming weeks. That might yet provide an opening for Kenny, but don’t bet on it.

The sense of drift is in contrast to the apparent progress made when EU leaders resolved at their last summit, in June, to break the bind between sovereign and bank debt.

Although there was a direct reference to Ireland at that time, whatever sense of urgency there was back then has since receded.

It may be apt at this point to recall the sequencing.

The June summit opened the door for the direct recapitalisation of banks by the European Stability Mechanism. This deal was made in anticipation of an imminent request for such aid from Spain.

At that time, Kenny prised a pledge from his counterparts that similar cases would be treated equally in the event of any ESM interventions. The leaders also promised to further improve the sustainability of the Irish rescue programme.

Weeks later, economics commissioner Olli Rehn raised the prospect of a deal this month. “As journalists you know that it’s the deadlines that run the world so it’s important that we have a very clear timeline,” he said on July 10th after meeting finance ministers.

It didn’t work out that way. Hopes for a speedy resolution were already fading when the German, Finnish and Dutch ministers declared in Helsinki that national bodies would remain responsible for historic banking debts. This was a clear setback for Kenny, who has insisted that it was the understanding in June that the ESM would bear legacy debts.

This is the position as the Taoiseach goes into the summit chamber today. It is already agreed that EU leaders will issue a direction to finance ministers “to draw up the exact operational criteria that will guide direct bank recapitalisations by the ESM, in full respect of the 29 June 2012 euro area summit statement”.

While this may be enough to satisfy Kenny’s demand for a restatement of the pledge to sever the loop between sovereign and bank debt, the Government is backing a push by France, Spain and Italy for a more explicit reiteration.

In the background, there are four big factors.

First, the tough line in Germany against the notion of any soft ESM deal for countries saddled with the debts of errant banks. Neither Dr Merkel nor her Finnish nor Dutch counterparts have stated for the record that the Helsinki statement reflects their official stance. However, the current situation still bears all the signs of a go-slow.

Second, the June statement made it clear that any ESM recapitalisations would be conditional on the establishment of a euro zone bank supervisor with the European Central Bank. Amid deep divisions over the scope, scale and timing of that endeavour, diplomatic sources say the core objective for the summit is to marshal the leaders behind the European Commission’s formal plan for a new “banking union”.

The third factor is the ECB’s promise to buy unlimited quantities of sovereign bonds to shore up any stricken country that enters a formal rescue programme. This has taken some of the heat from the crisis, removing an incentive from EU leaders to move further, faster.

Fourth, the expected Spanish request has not yet materialised. This means there has been no real negotiation of terms for any ESM deal, something that means the main protagonists are still in the realm of speculation.

None of these issues are likely to be brought to conclusion this time out.

The same goes for talks on deeper economic integration, including the possibility of a dedicated budget stream for the euro zone. Also on the table is the prospect of member states entering “contractual” programmes with the EU to execute economic reforms.

The alchemists of the EU may be busy but the solution to their abundant woes is still a distant dream.

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