Italy and Spain now have better conditions for financing their debts. After hours of negotiations, Germany finally gave in to pressure from the two countries.
"It was Italy's night." Is how one summit observer described the negotiations which lasted until early morning between EU leaders in Brussels. "First Italy made it to the final of the European Soccer Championship and then Mario Monti's performance against Chancellor Angela Merkel prevailed, said an EU diplomat.
The Italian prime minister, together with his Spanish counterpart Mariano Rajoy, was able to ensure that Italian and Spanish government bonds can be purchased from communal accounts of the eurozone bailout funds. In return for short-term assistance, no additional austerity programs will be necessary. Mario Monti hopes to be able to push ever increasing interest rates back on Italian and Spanish government bonds. "An inspection by the troika will not take place," a pleased Monti said early Friday morning.
Spain and Italy pressured Germany into relenting
No payment without a return
The troika - made up of the three controlling financial institutions, the EU Commission, the European Central Bank and the International Monetary Fund - are regularly auditing Greece, Ireland and Portugal to make sure they meet the requirements set down for them. Italy and Spain do not want to be controlled by the troika.
Chancellor Angela Merkel has always refused to allow direct purchases of government bonds without strict controls. After a long night of talks, she insisted the troika would also take Spain and Italy's finances under their control based on a budgetary assessment of the situation by the EU Commission.
"With this, a memorandum of understanding was established with a definitive timeframe. And, the troika monitors - as is customary in the EFSF and the ESM - the fulfilment of these requirements," said Merkel.
They concluded that Germany had not yet yielded the largest funding source for emergency funds. "In this respect, we remain completely with the scheme to date: Performance, compensation, conditions and control. To that extent, I think we've done something important, but our philosophy 'no payment without a return' has also remained true," Merkel maintained.
More control in the future
Monti and Rajoy had demanded short-term assistance, something analysts said they would also get. On Friday, the Italian stock exchange registered sharp share price increases. In return, the southern eurozone countries agreed to give up more sovereignty to the EU and to have their budgets and debt load assessed within the framework of a still-to-be created economic and fiscal union.
The same principle applies to the banking union, which is now also on the cards. Banks would be able to receive direct assistance under certain conditions from the European rescue fund. The charm of this move is that member states would avoid acruing more debt themselves with the rescue fund for rescuing their own banks. Spain has been one to push for this new form of bailout. Spain's banks need some 60 billion euros ($74 billion).
Rompuy eyes a 'breakthrough'
The President of the European Council, Herman van Rompuy, said the relationship between ailing banks and excessive public debt would now be broken. "We have decided something new. Banks will be able to get capital if they comply with certain conditions; that is, after we have created a central banking oversight authority."
Banking oversight, to which Germany attaches particular importance, will not be operational until the end of 2012. The question is whether Spanish banks can wait that long. They will need fresh capital in a matter of weeks. Chancellor Merkel insisted that first there needed to be controls before there was money. The details of this complicated procedure must now be worked out by the finance ministers of the eurozone countries.
The eurozone rescue fund will take over the liabilities for both banking recapitalizations and for the purchase of Italian and Spanish government bonds. That means that debt is indirectly transfered to all eurozsone countries. Merkel did not want to apply these tools for debt pooling. "But she finally had to give in to the pressure," said EU diplomats in Brussels.
French President, Francois Holland, who supports mutualizing debt, views the Brussels' compromise as a positive step.
"We want to have banking supervision. It will take a while, but remains a good aim," said Hollande. "Finally we have developed a vision for an economic and monetary union. That means we will work together. At every step there will be additional solidarity. A banking union is the first step."
The vision for enhanced cooperation, which for Merkel should end in a political union, is is only vaguely formulated in the summit documents. A more concrete proposal is expected in October and in December decisions are supposed to be made. It will take ten years until political union becomes a reality, said the President of the European Council Herman van Rompuy.
Author: Bernd Riegert / jlw
Editor: Gregg Benzow