The recent EU summit meeting in Brussels has surprised most people. It looks like they have come up with a three point plan to save the Euro. And the immediate reaction of the markets has been very favourable. After months of wrangling and doing very little have our leaders finally lanced the boil of the financial crisis?
The short answer is no, but they seem to have come up with enough to pacify the markets for the time being. This involves a 50% haircut on Greek debt, a further recapitalisation of banks and an improved fund (the EFSF) to provide medium term support to Italy and Spain. The key words here are medium term. Let’s say until spring of next year. By then a lot more will need to be done.
Basically there are two immediate challenges for the Eurozone. The first is to get their own house in order to ensure that the likes of Spain and Italy are protected against further speculation. To this end the Eurozone countries need to come up with a credible plan and timetable for creating some kind of fiscal union. It need not be a full fiscal union as the USA, but it needs to be credible enough to satisfy the markets. They need to start work on this soon and we will need to know the outcome by early next year.
The other challenge facing the Eurozone, along with most of the rest of the world, is how to get their economies growing again. For example if Greece does not start to grow again very soon it will once again be unable to repay its national debt, even with the current 50% haircut. The same will apply to Italy and Spain. How this growth is to happen as long as the EU, including the UK, stick to harsher and harsher austerity measures is a bit of a mystery. Things are not looking good.