Friday’s summit in Europe is the latest last-ditch attempt to get on top of the euro crisis. Earlier this week, the outlines of a deal began to take shape. Ahead of their meeting, Germany’s Angela Merkel and France’s Nicolas Sarkozy proposed new rules to stop eurozone states racking up too much debt, including automatic penalties for states with deficits exceeding 3% of GDP.
Ratings agency Standard & Poor’s (S&P) threatened a mass downgrade of the debt of 15 eurozone countries, including Germany and France. Ratings are under threat due to the weakening economic backdrop and disagreements on how to tackle the confidence crisis over debt. S&P said it might also cut the rating of the eurozone’s rescue fund, the European Financial Stability Facility (EFSF), which has to raise debt in the markets. Italy put forward an austerity programme designed to balance the budget by 2013.
What the commentators said
Clearly, Europe “has learnt nothing about the shortcomings” of the previous Stability and Growth Pact, said FxPro.com. That agreement to keep debt to 60% of GDP and deficits at 3% of GDP was repeatedly flouted during the good times, and this souped-up pact will have the same problem. Without tough external enforcement of the rules, “national political agendas and needs will dominate those of the EU leadership”.
The pact is also, as Andrew Sullivan put it on Thedailybeast.com, “all German discipline and no real leap to fiscal union”. The hope has been that the European Central Bank would launch a massive bond-buying programme if it saw progress toward a solution whereby the whole region stands behind the debt of troubled countries. “That belief must now be challenged,” said FxPro.com.
Italy, meanwhile, is making progress, said Lex in the FT, but it still needs labour market reforms to boost growth. Citigroup reckons “Italy’s structural sclerosis” is so bad that its potential growth rate is currently zero. As for plans to bolster the EFSF by bringing forward the advent of the European Stability Mechanism (its successor, originally due to appear in 2013), don’t get too excited, said Michael Hewson of CMC Markets. Europe hasn’t yet been able to “fund the EFSF properly”. How will it finance a second fund? The risk, said The Economist website, is the summit will produce too little, too late.