Van Rompuy: “Our agenda will be the financial stability of the euro area as a whole…”

European Council President Herman Van Rompuy has called an emergency summit of divided euro zone leaders on Thursday to address the existential European debt crisis.  From the Irish Times report

“Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek programme,” said Mr Van Rompuy in a brief statement last night.

“I have asked for the preparatory work to be brought forward inter alia by the finance ministries.”

And they have the results of the European Banking Authority (EBA) stress tests to inform them.  A separate Irish Times report notes

The authority’s annual examination has provoked anger among banks, with some unhappy about the amount of information disclosed last night.

One German bank, Helaba, withdrew from the process last week, while Spanish banks said the rules presented their cases unfairly .

However, authority chairman Andrea Enria, speaking at a London press conference, was adamant: “Nobody can withdraw the process. I would urge everybody not to underestimate the importance of the EBA recommendations, We expect it to be implemented,” he declared.

Unlike last year, the 90 banks examined by the authority were judged according to how much sovereign debt they held from the EU countries in most difficulties, Greece, Ireland and Portugal; last year sovereign debt was regarded as equally secure regardless of the issuing nation.

The figures will be closely examined over the weekend by financial analysts, though the report is likely to cause further turbulence in the markets when they reopen on Monday.

The BBC’s business editor, and still everyone’s hero, Robert Peston, sees a message in those stress tests

The EBA said it recommends that these banks be forced by their respective national regulators to raise additional capital as a protection against possible further losses from loans going bad, with a deadline of 15 October for the formulation of remedial plans and 15 April 2012 for implementation.

Now this matters, because it is the first time that an EU institution has hinted that there is a realistic possibility of default by Greece, Ireland and Portugal.

The important point is that the stress tests forced banks to make provision for losses on their loans to distressed nations, such as Greece, from a change in the terms of those loans that would fall short of actual default.

But if, as the EBA says, those estimated losses may not be the worst that could happen, the implication is that default is no longer unthinkable.

And the EBA is insisting that plans to cope with such a default have to be drawn up by vulnerable banks within three months. That suggests a restructuring of Greek sovereign debt – which would see a formal reduction in the value of that debt – is a more imminent prospect than official pronouncements by eurozone governments and EU officials would suggest.

He thinks default for Greece, Ireland and Portugal “would be just about bearable”, but that further contagion was still possible.

So after what traders described as the scariest week of trading in European debt markets since the creation of the eurozone – with some investors not wishing to touch Italian government debt – it is increasingly clear that a restoration of confidence in the integrity of Europe’s currency union probably requires a more comprehensive and far-reaching plan than just sorting out Greece.

Even if they achieve that, the existential crisis remains.  [Europe is still sexy! – Ed]  Possibly…

Once again, as for the wider picture?

The existential crisis will remain…  And, for supporters of the “European Project”, the longer-term options are stark.

And one set of supporters have nailed their colours to the mast in an Irish Times editorial

If going back is not an option, standing still and hoping the crisis will abate of its own accord is fast ceasing to be a realistic alternative. The collective European response has been, almost without exception, too little too late. Given the extent of the crisis, the response now can be nothing less than overwhelming. With Italy and Spain infected by the contagion that Ireland, Greece and Portugal were unable to recover from, completing the euro project by creating a fiscal union appears to be the only real alternative to preventing it joining failed monetary unions in the dustbin of history.

The issuing of eurobonds has consequence far beyond finance and economics. For euro zone states to fund themselves with eurobonds would be a step towards full political union. But this has always been the project’s ultimate end-point. And for good reason. Europe’s extraordinary and unprecedented experiment in political and economic co-operation has proved, mostly and overwhelmingly, to be a success. Europe must overcome its debt crisis or put all that at risk.

Whatever shape that “full political union” takes…

You were warned.

But whether or not the “European project” goes quietly, or even noisily, “the result [remains] a crisis in European democracy”.

And here’s a quote, from Dani Rodrik, that I noted back in May 2010.

Deep down, the crisis is yet another manifestation of what I call “the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.