Not for the first time, the leaders of the eurozone have stepped back from the brink only after staring hard over the precipice. But this time at least they did more than just recoil reflexively from a looming disaster.
While Thursday’s summit certainly did not produce a comprehensive solution to the sovereign debt crisis, it cannot be dismissed as just another last-minute fix. The contents of the communiqué suggest an attempt to grope towards a better prescription for dealing with the crisis. If not the finished article, it is at least based on a sounder diagnosis of the eurozone’s ills.
Debt solvency, contagion and an absence of economic growth are at the heart of the crisis afflicting the eurozone. The leaders showed some willingness to tackle the first, proposing to cut the burden on the three peripheral countries in European Union/IMF programmes: Ireland, Portugal and Greece. They will benefit from lower interest rates and a substantial extension of their debt maturities.
They have also bitten the bullet on debt restructuring in the case of Greece. The decision to allow bond buybacks on the open market is particularly welcome. If, as seems to be the case, the incentive for principal reductions through debt exchange is to offer new securities enhanced with collateral, then that is a Brady bond type solution of the sort this newspaper has advocated.
What is disappointing is the modesty of the debt relief so delivered. It is unclear why the bond buybacks aim at 20 per cent reductions in principal when the market discount on Greek bonds is more than 40 per cent.
There are other welcome – if belated – nods in the direction of common sense. To tackle contagion, the role of the European financial stability fund is to be expanded to allow it to intervene pre-emptively on behalf of countries that are not in rescue programmes. True, there is an omission: no commitment has been made about increasing its size – surely necessary if it is to act as an effective deterrent. But at least the principle has been established.
There is also a nod towards the need to stimulate growth – if a perfunctory one. Grandiloquent talk about a “Marshall Plan” – in fact the acceleration of some structural funds – was wisely excised from the final statement. More must be done.
To be sure, the deal has shortcomings. The first is the failure to expand the EFSF to meet its new role. Unless this is rectified, governments run the risk of having to increase it under pressure from markets. At best this would make them look foolish; at worst it could undermine the good parts of the plan.
The second is the decision to allow the EFSF to recapitalise troubled banks. While there may be a case for united fiscal exposure to the eurozone’s banks, this seems a hasty way of establishing what is a big principle.
It also cements the mistake that private banks’ senior creditors should always be made whole since the idea seems to be that the EFSF would step in and recapitalise banks rather than letting losses fall on their creditors. Instead of muddling the EFSF’s purposes, it would surely be better to create a separate fund for putting taxpayers’ money into banks and combine it with the EU’s plan to create a European bail-in mechanism.
But if the deal remains work in progress, it is a step in the right direction for leaders who have until recently seemed in denial about the scale of the crisis. They are at least now trying to equip themselves with the tools necessary for the job at hand.
Success is not guaranteed. The blanks in the package need to be filled in and governments must commit themselves to execution. Too often, once the immediate crisis has passed, there has been a slackening of effort. That cannot be allowed to happen again.
It should, however, be acknowledged how far stances have shifted. There has been a necessary softening of cherished positions. Germany has dropped its opposition to the use of the EFSF for on-market debt purchases. The European Central Bank has modified its blanket opposition to any restructuring of sovereign debt. This is progress.
The main obstacle to a comprehensive deal remains politics. Governments in the main creditor nations must convince their sceptical citizens that this is a good use of their tax money. This is a formidable political sales job after the waste of so much trust and time. But they must shoulder the task, or face the burden of explaining where it all went wrong.