EU Summit amid Euro Crisis

-COL DR. ABDUL RUFF

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Even as EU remains a fragile unification of freewill European nations, many European stalwarts try to somehow stitch a sort of unity among Europeans with a semblance of propose mainly of promoting US interests in Europe and elsewhere. EU summits have become a routine phenomenon to bring about “unity” by targeting Turkey, the only Muslim nation in Europe. However, without economically strong Turkey, Europe’s economy would be presented in a very weak status.

Soon after the 25th NATO Summit on 20 and 21May 2012 in Chicago, USA and  the G8 Summit on May 18-19, 2012 at Camp David in Frederick County, Maryland USA, the leaders of European Union (EU), many of whom are also the NATO-EU members,  themselves also met in Brussels USA to debate economic worries. .

EU leaders met on 23 May for an informal summit in Brussels amid continuing worries about economic and political problems putting pressure on the euro. EU has been searching for ways to boost growth and employment as well as address the implications of the continuing political uncertainty in Greece.

The formal agenda of meeting is jobs and growth, and specifically three ideas policymakers hope will provide some near-term stimulus to the European economy, which registered no growth in the first quarter of the year and threatens to slip into recession. On 22 May, agreement was reached with the European Parliament on 'project bonds', instruments backed by the EU budget that can be used to finance energy, transport and telecoms projects alongside private sector investment. A pilot program, using EU capital of 230 million euros, will run until 2013 and if successful could lead to up to 4.6 billion euros of new investment.

As well as exploring ways of resolving the sovereign debt problems that have torn the economies of Greece, Portugal and Ireland apart and threaten the stability of the euro, the leaders assessed how to stabilize their banking systems. Spain is a particular concern, with a number of its banks laden with bad debts incurred by excessive lending during a property boom that has long since turned to bust and still has some way yet to go before it touches bottom.

Despite fears that Greece could exit the currency bloc, Spain, where the economy is in recession and the banking system is in need of wholesale restructuring, is at the frontline of the crisis, with concerns that it could follow Greece, Ireland and Portugal in needing a bailout. Euro zone officials Euro group Working Group (EWG) have agreed that each euro zone country must prepare an individual contingency plan in the eventuality that Greece decides to leave the single currency area. The agreement was that each euro zone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro.

On the eve of the summit, the Organization for Economic Cooperation and Development (OECD) issued a report that confirms the intensification of recessionary trends. It warns that the “fragile, extremely uneven” international recovery “could be derailed by the crisis in the euro area.” The OECD has downgraded its prognosis for growth in its 34 member states from an annual rate of 1.8 percent in 2011 to 1.6 percent in 2012. The report makes clear that the chief culprit in dragging down world growth is Europe.

There are significant divisions in Europe on what a growth component should consist of and who should pay for it, but there is also broad agreement on the part of all European governments, the US and also the OECD that austerity measures should be continued, together with the introduction of labor market “reforms” based on the German model and aimed at establishing a huge low-pay sector in every country. Germany on the board of the European Central Bank called for a firmer fiscal regime for the euro zone and stressed that there could be no renegotiation of the existing fiscal pact, ruling out a euro bond solution, and proposing that a plan for a two-tier Europe to be funded by monies raised from the European budget and a financial transaction, or Tobin, tax.  Germany also argued that proposals to expand the EU into the Balkans and Turkey be dropped for the foreseeable future.

In what amounts to an indictment of the austerity policies imposed by the “troika”—the EU, the European Central Bank and the International Monetary Fund— a report highlights the risk of a renewed banking crisis across the continent. It states: “Adjustments in the euro area are now taking place in an environment of slow or negative growth and deleveraging, prompting risks of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.”

There is a proposal to double the paid-in capital of the European Investment Bank, the EU's co-financing arm, to a little over 20 billion euros. That would increase its leverage and could eventually release up to 180 billion euros for investment in infrastructure. Agreement on that proposal could be reached by the June 28-29 summit, but there remains opposition from some member states concerned that the EIB's strong track record could be undermined if money is thrown at bad projects. 

Another initiative is to redirect EU structural funds - money from the EU's multi-year budget used to help poorer countries improve their infrastructure - to other areas where it might reap more immediate growth rewards. The figures remain vague, and even if all three proposals were to be activated quickly - economists and analysts are not convinced that would provide a sufficient shot in the arm to the euro zone and wider EU economy.

For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not held their own mini-summit beforehand to agree positions, marking a significant shift in the traditional Franco-German axis. Instead, new French President Francois Hollande met Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the EU summit.

Hollande's election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth now a rallying cry for other leaders. That has set up a showdown with German Chancellor Angela Merkel, who supports growth but whose primary objective is budget austerity and structural reform. While she and former French president Nicolas Sarkozy did not always see eye-to-eye, in Hollande she is faced by someone with a different vision. 

In his first EU summit, Hollande has chosen to make a stand on euro bonds - the idea of mutualising euro-zone debt - despite consistent German opposition to an idea that has been hotly debated for more than two years.  But Merkel shows no sign of dropping her objections to the proposal, which she has said can only be discussed once there is much closer fiscal union in Europe. The Netherlands, Finland and some smaller euro zone member states support her in that position, setting the stage for what could be a divisive discussion. Austria's chancellor supports Hollande's line.

US President B Obama sided with France against Germany. At the end of the NATO summit in Chicago, Obama returned to the theme of the European crisis to explicitly support a number of proposals made by France to prevent a collapse of the Greek economy and banking sector spreading to Spain and Italy. While not mentioning Germany by name, Obama’s comments were widely interpreted as an attempt to increase pressure on Europe’s biggest economy and the fourth biggest economy in the world to come up with substantially more money to fund bank recapitalization and selected infrastructure programs.

The French proposals, supported by UK and Italy, include a major increase in EU bailout funds, primarily through the introduction of a new pan-European financial instrument (so-called euro bonds), lower interest rates, an EU “growth strategy,” and more massive sums of money to be given to the banks.  The French government was intent on placing euro bonds along with a number of other measures on the agenda of summit.

A Few Observations

On the eve of the recent EU summit, European leaders said would try to breathe life into their stricken economies at a summit over dinner plus liquor, but disagreement over the issue of mutual euro-zone bonds and whether they can alleviate two years of debt turmoil dominated the gathering. 

Europe is reeling under a very serious economic crisis, calling the global position of euro into question. Seven of the 17 countries in the euro zone were officially in recession. The only reason Europe as a whole has avoided recession is the stronger growth of the German economy, which has been able to compensate for weaker markets in Europe by expanding its exports to other parts of the world, notably China, the US and Asia.

The total amount of bad debt is estimated at more than 180 billion euros ($240 billion), while efforts to recapitalize and restructure the stricken banks have so far fallen short. One proposal on the table was for the euro zone's rescue funds to be allowed to recapitalize banks directly, rather than having to lend to countries for on-lending to the banks. But that is another idea with which Germany is uncomfortable, even though Chancellor Merkel said a way should be found to dismantle banks across borders, a possible nod to a pan-euro-zone bank restructuring scheme.

Many economists argue vehemently against euro bonds or any major new financial injections by Germany to bail out ailing European economies. Paralleling the growing economic gulf between individual European countries, political differences are also growing on how to deal with an economic crisis rapidly spiraling out of control. 

No decisions were made at the summit, which was intended to promote ideas on jobs and growth ahead of another meeting at the end of June, but it is clear the debate will be intense, not just over euro bonds but over how to rescue European banks and whether to give more time to struggling euro zone countries to meet their budget deficit goals. Herman Van Rompuy, the president of the European Council, the body which represents EU leaders, said heads of state and government should abandon taboos as they think about the future of Europe and its economic framework. It is not too early to think ahead and to reflect on possible more fundamental changes to economic and monetary union. 

The leaders of the 27 EU countries agreed to give institutions such as the European Investment Bank the task of drawing up proposals for growth in time for another summit in June. Left unresolved was what Europe should do to spark economic growth and restore the confidence of investors, who have driven some countries' borrowing costs to unsustainable levels. Also, the solution to Europe's problem of too much government debt has not been resolved. The perception that European leaders lack the political will to tackle the continent's financial and economic problems has left markets on edge for weeks. Recession is spreading. Banks are under pressure. The biggest fear is that if Greece cannot be saved, larger economies — such as Spain or Portugal — might face the same fate.

EU leaders are unanimous that if they don't have a contingency plan, especially for Greece, that would be irresponsible on their part. European leaders, therefore, discussed ways to revive their economies with growth and jobs on the agenda along with the situation in Greece. Debates are never ending, of course, and the Europeans and Americans are fond of fake debates endlessly!