EU leaders are facing “a monster of a crisis” that amplified even as the French and German leaders agreed measures that are to set the stage for the 8-9 December summit in Brussels.
News of the Franco-German deal was trumped by warnings that the eurozone’s fittest economies could have their credit ratings downgraded.
A deal on tighter fiscal discipline in Europe is a positive step but could fall short of what is needed. “What should happen is that there should also be an announcement of a much bigger rescue fund,” said Uri Dadush, a former World Bank official who directs the Carnegie International Economics Programme in Washington.
He advised EU leaders to bolster the International Monetary Fund and the eurozone bailout fund, or European Financial Staiblity Facility (EFSF), to some €1.5 trillion to create a “firewall” to protect the shaky finances of Italy and Spain. The original bailout fund was €440 billion.
“We are very much at risk,” Dadush told EurActiv by telephone. “Part of the reason is that the issue here is more than political will – people are emphasising too much the political aspect. The political aspect is important of course, but the crisis is a crisis of economic structure, and the amounts of money are so large that even with strong political will, this will put a lot of strain on the core of Europe, a lot of strain on the IMF."
"This is a monster of a crisis, even if the politics were aligned,” the French economist said.
A plan by French and German leaders to strengthen fiscal coordination and punish countries that violate budget rules is likely to dominate the EU leadership summit. The meeting comes nearly seven weeks after European leaders met in prolonged sessions amid political and financial crises in Greece and Italy to hammer out a "comprehensive solution" to the euro’s troubles.
The plan reflects German concerns about ceding too much power to the European Central Bank, and a joint Franco-German stand against a euro bond that would leverage the credit worthiness of Germany and a handful of other stable countries to help more troubled economies in the 17-nation currency zone.
Benedicta Marzinotto, a fellow at the Bruegel think tank in Brussels, says EU leaders from stronger countries need to work out their differences and send “a clear message” at the end of the summit.
“They should thus come up with a clear and simple plan for a fiscal union and reach a consensus on the fact that the ECB might be of help in the transition, until some form of debt mutualisation is agreed upon," she said.
Others also argue for a strong role for the Frankfurt-based bank.
Simon Tilford, chief economist at the Centre for European Reform in London, writes that Germany’s position on sidelining on the ECB’s potential role is hurting recovery. He says that in exchange for tougher fiscal standards and sanctions on countries that miss them – the core of the latest Franco-German deal – “Germany should end its opposition to the ECB acting as lender of last resort and agree to a gradual move to debt mutualisation.”
Christopher Sims, Nobel prize-winning economist, told Reuters that the eurozone needs its own jointly issued bonds and a common tax to back the bonds.
"Fiscal integration needs to involve more than just budget discipline, more than just the centre telling countries they have to shape up and raise taxes or cut expenditures," the Princeton University professor said, lending his support to views that financial market economists have been pressing.
Merkel under pressure
Meanwhile, in a slap at German Chancellor Angela Merkel’s handling of the eurozone problems, the opposition Social Democrats adopted a resolution seeking “an alliance of European renewal,” and calling for a “stronger, social Europe” and fixes for the eurozone, EurActiv.de reported.
And a manifesto released by three European think tanks – Confrontations Europe, the Bertelsmann Stiftung of Germany and Fondazione Astrid of Italy – urges EU leaders not to neglect the needs of citizens in creating a strong and integrated Europe, says a report by EurActiv.fr.
Even if EU leaders agree to treaty revisions that could lead to sharper budget discipline and perhaps a tighter fiscal union for countries using the euro, a short-term crisis remains.
"I think that in the end they are going to also have to provide more firepower to the [EFSF] and the IMF, and that is an open question,” Dadush said. “And in the long term they are going to have to move towards a fiscal union, towards a eurobond.”
He expects Germany to eventually agree a more muscular rescue fund and a euro bond. “Germany is very unlikely to go for this at this point. However, Germany has resisted every step but then in the end, ways are found.”