BRUSSELS—European leaders' new measures Friday to tackle the euro zone's debt crisis—promising to use their sizeable rescue funds more flexibly and pave the way for the European Central Bank to assume an expanded role as supervisor for the euro zone's banking sector—were welcomed as a rare bold step in the right direction.
But the unexpected statement of unity issued in the small hours of Friday morning gave way almost immediately to a wave of ifs and buts, as briefings by national leaders once again highlighted the residual divisions between them.
The centerpiece of the agreement was that in future, the euro zone's two bailout vehicles, the European Financial Stability Facility and its permanent successor, the European Stability Mechanism, will be able to inject capital directly into banks, avoiding the need for their home governments to ruin their own balance sheets with new debts in the process.
In addition, the leaders also agreed that loans to be made to Spain for the purpose of recapitalizing its banks won't be senior to Spain's existing government debt. Both decisions went to the heart of market concerns about the vicious circle between bank and sovereign debt, and the need to break it.
As a result, the yields on Spanish and Italian government debt tumbled Friday, while their banks' stocks soared."The euro project is now stronger and more credible," Spanish Prime Minister Mariano Rajoy said in a press conference.
The decisions also drew praise from those outside the single-currency area.
"I think they took some important steps forward last night and I very much applaud that," said U.K. Prime Minister David Cameron, who has seen his own economy start to shrink again due to the spread of recession and financial volatility on the Continent.
But leaders' subsequent briefings were poles apart on some key aspects of the deal they had just reached. In stark contrast to his German and Dutch counterparts, French President François Hollande said a key clause of the ESM had been changed to allow decisions to be made without unanimity.
Unlike the EFSF, Mr. Hollande said, the "ESM has an advantage, namely that it doesn't have unanimity." Once the EFSF had been replaced by the ESM, the need for full unanimity would be removed, he said.
The comment surprised EU officials, who said Mr. Hollande's view wasn't in line with the current ESM treaty, which will be ratified by France and other countries in the coming weeks.
"If Hollande said this, we might as well all go home and scrap the ESM, because this was not what was agreed in the ESM treaty," a diplomat from one euro-zone country said.
By contrast, German Chancellor Angela Merkel, at pains to stress that she had given nothing away in a night that saw a big shift away from previous negotiating positions, told her press corps that the German parliament would still retain effective veto rights over anything it didn't like in the new ESM.
Not only would it have the right to vote on every single use of ESM funds, but it would also retain the right to vote down these or any other proposed changes to the way the ESM works.
The original wording of the ESM's treaty requires that ESM decisions be taken in unanimity, but allows funds to be mobilized on the basis of a qualified majority of 85% of votes cast, if there is a risk to the financial stability of the entire euro zone.
Ms. Merkel also tried to stress that another key decision taken Friday—giving euro-zone countries access to the bailout funds even without additional policy constraints—didn't mean that she'd conceded too much.
"We have stuck completely to our existing scheme: something in return for something else—conditionality and supervision," Ms. Merkel said. Those conditions will now be set by the European Commission as part of its annual country reports, the first of which were published in May.
In principle, as long as a country is complying with the policy recommendations in its Commission report, it can ask for the EFSF or ESM to help support its bond market, whether through purchases in the primary market—effectively a direct placement of debt with the bailout fund—or on the open market.
Italian Prime Minister Mario Monti fought hard for the new mechanism, which he had hoped would remove the political stigma of using the bailout funds, but said Friday he didn't intend to use it and repeated that Italy would eliminate its structural budget deficit by 2013.
Crucially, most of what was agreed Friday will depend on the establishment, by unanimity, of a new body at the heart of Europe's monetary union to oversee its banks--the first step on the way to the much-touted 'banking union'.
That will require intense and highly sensitive discussions about the supervisor's precise powers. It will also involve parallel negotiations on the creation of a euro-zone-wide program for deposit insurance and a single framework for resolving failed banks.
The negotiations on those points will be starting with a major disadvantage in the current lopsided state of the euro-zone financial sector, in which German, Dutch and Finnish banks are awash with inflows from retail and corporate depositors, while banks from Greece, Spain, Italy, Portugal and Ireland remain absolutely dependent on the ECB.
"The details about liability ... still have to be negotiated individually, and I can predict now that they will be quite difficult negotiations because we are in a new area, and for that reason it won't just take only 10 days," Ms. Merkel told a press conference.
The leaders have given their finance ministers only 10 days to adopt the basic steps for implementing their decisions, but in a clear signal that direct bank aid may not be available until 2013, euro-zone leaders gave member states until the end of the year to agree on the issue of banking supervision.
Some immediately sensed a risk of the kind of implementation gap that has dogged the euro-zone's crisis strategy since 2010.
"We have an agreement in principle but the devil could lie in the details," one senior euro zone official said. "The unanimity that Germany wants could be a big sticking point."
wsj.com
But the unexpected statement of unity issued in the small hours of Friday morning gave way almost immediately to a wave of ifs and buts, as briefings by national leaders once again highlighted the residual divisions between them.
The centerpiece of the agreement was that in future, the euro zone's two bailout vehicles, the European Financial Stability Facility and its permanent successor, the European Stability Mechanism, will be able to inject capital directly into banks, avoiding the need for their home governments to ruin their own balance sheets with new debts in the process.
In addition, the leaders also agreed that loans to be made to Spain for the purpose of recapitalizing its banks won't be senior to Spain's existing government debt. Both decisions went to the heart of market concerns about the vicious circle between bank and sovereign debt, and the need to break it.
As a result, the yields on Spanish and Italian government debt tumbled Friday, while their banks' stocks soared."The euro project is now stronger and more credible," Spanish Prime Minister Mariano Rajoy said in a press conference.
The decisions also drew praise from those outside the single-currency area.
"I think they took some important steps forward last night and I very much applaud that," said U.K. Prime Minister David Cameron, who has seen his own economy start to shrink again due to the spread of recession and financial volatility on the Continent.
But leaders' subsequent briefings were poles apart on some key aspects of the deal they had just reached. In stark contrast to his German and Dutch counterparts, French President François Hollande said a key clause of the ESM had been changed to allow decisions to be made without unanimity.
Unlike the EFSF, Mr. Hollande said, the "ESM has an advantage, namely that it doesn't have unanimity." Once the EFSF had been replaced by the ESM, the need for full unanimity would be removed, he said.
The comment surprised EU officials, who said Mr. Hollande's view wasn't in line with the current ESM treaty, which will be ratified by France and other countries in the coming weeks.
"If Hollande said this, we might as well all go home and scrap the ESM, because this was not what was agreed in the ESM treaty," a diplomat from one euro-zone country said.
By contrast, German Chancellor Angela Merkel, at pains to stress that she had given nothing away in a night that saw a big shift away from previous negotiating positions, told her press corps that the German parliament would still retain effective veto rights over anything it didn't like in the new ESM.
Not only would it have the right to vote on every single use of ESM funds, but it would also retain the right to vote down these or any other proposed changes to the way the ESM works.
The original wording of the ESM's treaty requires that ESM decisions be taken in unanimity, but allows funds to be mobilized on the basis of a qualified majority of 85% of votes cast, if there is a risk to the financial stability of the entire euro zone.
Ms. Merkel also tried to stress that another key decision taken Friday—giving euro-zone countries access to the bailout funds even without additional policy constraints—didn't mean that she'd conceded too much.
"We have stuck completely to our existing scheme: something in return for something else—conditionality and supervision," Ms. Merkel said. Those conditions will now be set by the European Commission as part of its annual country reports, the first of which were published in May.
In principle, as long as a country is complying with the policy recommendations in its Commission report, it can ask for the EFSF or ESM to help support its bond market, whether through purchases in the primary market—effectively a direct placement of debt with the bailout fund—or on the open market.
Italian Prime Minister Mario Monti fought hard for the new mechanism, which he had hoped would remove the political stigma of using the bailout funds, but said Friday he didn't intend to use it and repeated that Italy would eliminate its structural budget deficit by 2013.
Crucially, most of what was agreed Friday will depend on the establishment, by unanimity, of a new body at the heart of Europe's monetary union to oversee its banks--the first step on the way to the much-touted 'banking union'.
That will require intense and highly sensitive discussions about the supervisor's precise powers. It will also involve parallel negotiations on the creation of a euro-zone-wide program for deposit insurance and a single framework for resolving failed banks.
The negotiations on those points will be starting with a major disadvantage in the current lopsided state of the euro-zone financial sector, in which German, Dutch and Finnish banks are awash with inflows from retail and corporate depositors, while banks from Greece, Spain, Italy, Portugal and Ireland remain absolutely dependent on the ECB.
"The details about liability ... still have to be negotiated individually, and I can predict now that they will be quite difficult negotiations because we are in a new area, and for that reason it won't just take only 10 days," Ms. Merkel told a press conference.
The leaders have given their finance ministers only 10 days to adopt the basic steps for implementing their decisions, but in a clear signal that direct bank aid may not be available until 2013, euro-zone leaders gave member states until the end of the year to agree on the issue of banking supervision.
Some immediately sensed a risk of the kind of implementation gap that has dogged the euro-zone's crisis strategy since 2010.
"We have an agreement in principle but the devil could lie in the details," one senior euro zone official said. "The unanimity that Germany wants could be a big sticking point."
wsj.com
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