Euro crisis: Back from the brink?

Well, perhaps…  Eurozone leaders emerged from their emergency summit yesterday offering a new €109billion bail-out for Greece with twice as long to pay it back [30 years] at a lower interest rate than before.  It’s a “restricted default event”, according to ratings agency Fitch.  The draft agreement in full is here [pdf file].

Ireland and Portugal get an interest rate cut too – Karl Whelan’s busy at Irish Economy calculating what it means for Ireland.  But the private sector involvement in Greece is, we’re told, “an exceptional and unique solution”.

As BBC economics editor, Stephanie Flanders, notes

On the question of private sector involvement, attention has understandably focussed on the default issue, and whether it is credible to simply assert that this will apply to “Greece and Greece alone”.

But when we stand back from the deal, I suspect the larger questions will be around the actual amount of debt relief that has been offered to Greece.

If the private sector is accepting a 21% reduction in the net present value of their Greek holdings, in exchange for longer term bonds from a country that is now able to service to its debt, that would be a pretty good deal for the banks. Right now the market discount on those bonds is more like 40%.

But that assumes that the deal has taken further Greek defaults off the agenda. I don’t think it has.

We need to see more details, but on the face of it, the deal has simply taken the Greek programme back into the realms of “just about plausible if everything goes right”.

And whilst the BBC may headline a boost in the stock markets, elsewhere reports are of a cooler response.

But it’s the wider political implications of what’s been agreed that is the real story.  As a largely positive Guardian editorial notes

Most of all, eurozone leaders have failed once again to make a democratic case for what they are proposing. The pot for eurozone bailouts, the European Financial Stability Facility, is set to balloon, representing a sizable claim on European taxpayers. Yet it was cooked up between Mr Sarkozy and Mrs Merkel and rammed through in a few hours at a summit – with no mention of a vote or accountability to electorates. This is Europe’s democratic deficit writ large.

And what of the “sweeping new powers” for the European Financial Stability Facility (EFSF)?  At the Daily Telegraph, Ambrose Evans-Pritchard writes

Chancellor Angela Merkel said the goal was to “go to the root of the problems”, but she may not find it easy to secure political assent for such sweeping concessions from her own parliament. The accord is a spectacular volte-face. Her mantra until now has always been that “collectivisation of risks” would be a grave error.

The terms overstep a resolution passed by the Bundestag limiting how far she could go in committing Germany to any form of transfer union or pooling of debts. The use of the EFSF as a fiscal fund without treaty authority further complicates a ruling by the German constitutional court on the legality of the bail-outs expected in September.

Such changes to the EFSF will require ratification by each of the national parliaments. It may require an amendment to the Treaties, greatly raising the bar in Germany.

It would seem that, faced with the stark options available to them, eurozone leaders have chosen to move towards even greater fiscal union.  As a result, Simon Jenkins in the Guardian is not happy.

“Ever closer union” was always a dangerous fantasy, a top-down imperialism forged in the over-fed minds of the cardinals of a pan-European faith. It thought it could deny political reality. Its hubris lay in a belief that somehow monetary union could leave national identity untouched, that a corrupt European parliament could offer democratic accountability enough. Now the good times are over, that accountability cannot validate the awful disciplines that must be imposed on debtor nations.

Vigorous domestic democracy is the one strength of Europe’s postwar states. Distant discipline will not wash. Ever closer union falls squarely into the historian Barbara Tuchman’s definition of a grand historical folly, “a policy demonstrably unworkable” and widely known as such at the time. It was a policy pursued by Europe’s leaders, like so many follies before, as “a love-child of power”.

The attempt to impose fiscal union on all Europe will bring its demise. But where Osborne and his brand of scepticism are wrong is in so obviously willing this demise. When monetary union reaches breaking point and unravels in an orgy of xenophobia, Britain will not be immune from the chaos. The pocket Napoleons who embarked on this venture may meet their Waterloo. But Britain’s economy is unlikely to escape the carnage.

And the Telegraph’s Benedict Brogan has a few questions

In the UK too: there will have to be a Commons vote, and because of the legislation before Parliament even now, will there also have to be a referendum? Do these changes affect Britain enough to qualify? How will the Coalition fare under this new strain? George Parker has previewed the clash ahead here. If the Tories make plain that they now want a two-tier Europe, what do the Lib Dems do? What about those Tories who instinctively fear that a core Europe will have untold dire consequences for us? We are talking about abandoning a decades-old British belief in remaining at the heart of a one-tier fits all Europe. The FCO must be having a fit. What we need now is to hear from the Prime Minister what he believes: is this an opportunity to overhaul the terms of the deal?

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