European leaders finally unveiled a new package of measures to tackle the Eurozone’s debt crisis on 27 October. Support for the European Financial Stability Facility (EFSF) is to be increased from €440 billion to €1 trillion and private holders of Greek sovereign debt are to be offered 50% of their outstanding debt holdings. The markets initially welcomed the deal, with bank stocks rebounding impressively and major stock indices around the world registering 2-5% gains on the day.
While it will take at least a generation to get the Greek economy back on track, pledges to offer insurance on Eurozone members’ debt and attract greater private and public investment into the Eurozone are to be welcomed. Yet French president Nicolas Sarkozy was perhaps more prescient than he knew when he triumphantly described the agreement as “a credible and ambitious and overall response to the Greek crisis”.
For while €1 trillion is an eye-watering figure, it is merely sufficient to settle concerns over Greek debt, not over the wider fallibility of the Eurozone’s more vulnerable economies. It would certainly be inadequate to prevent an Italian or Spanish default, with the Italian bond market alone worth €2-3 trillion. At the same time, the headline figure of $1 trillion in support has been arrived at by EU plans to leverage the €250 billion left in the EFSF four or five times through debt insurance and other vehicles. Such a strategy may not yield such a high figure in practice.
In the longer term, EU leaders have pledged that there will be greater enforcement of agreed limits on annual budget deficits and total debt as proportions of GDP. This could have profound implications whether or not the promise is actually implemented. Such restrictions were drawn up at the inception of the euro but were not enforced and it remains to be seen whether there is greater political will to police them this time around. Even in the positive atmosphere of 27 October, the EU forecast on Greek debt as a percentage of GDP was as high as 120% in 2020, so will other member states accept one debt threshold for themselves and another for Greece?
On the other hand, EU leaders accept that more stringent budgetary controls will require greater financial integration and the creation of a budget watchdog with real teeth. Such harmonisation would take us one step closer to a federal structure: the lauded or feared European superstate, depending on your point of view. This would generate new tensions between federalist nations and more sceptical states, with some countries likely to be torn between the two camps. Such stress and strain is hardly what the EU needs at this delicate time.