Despite fears Greeks could open the departure door if they vote for anti-bailout parties at a June 17 election, Spain, where the economy is in recession and the banking system in need of restructuring is at the front line of the crisis. After meeting Hollande, Rajoy said he had no intention of seeking outside aid for Spain’s banks, which are laden with bad debts from a property boom that bust and still has some way to go before it touches bottom.
But his government said its rescue of problem lender Bankia would cost at least nine billion euros and it is also seeking ways to help its highly indebted regions meet huge refinancing bills. Socialist Hollande’s election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth rather than debt-cutting now a rallying cry for other leaders. That has set up a showdown with conservative Merkel, whose primary objective is budget austerity and structural reform. At his first EU summit, M Hollande chose to make a stand on euro bonds – issuing common euro zone debt – despite consistent German opposition to the idea. “I was not alone in defending euro bonds,” he said.
Mrs Merkel showed no sign of dropping her objections to the proposal, which she has said can only be discussed once there is much closer fiscal union in Europe. “There were differences in the exchange about euro bonds,” she said bluntly. The Netherlands, Finland and some smaller euro zone member states support her.
No major decisions were made at Wednesday’s summit, which was intended to promote ideas on jobs and growth ahead of another meeting at the end of June. But debate was intense, not just over euro bonds but over how to rescue banks and whether to give more time to struggling euro zone countries to meet their budget deficit goals. “We haven’t come together to confront each other … but we have to say what we think – what are the right instruments, the right methods, the right steps, the right initiatives to raise growth,” Hollande said.
The leaders discussed broad measures to stem the fallout from a winding up or restructuring of bad banks, EU officials said, with the European Central Bank pressing for the bloc to stand behind its struggling lenders but with Merkel’s approval seen as far from guaranteed. At the heart of the discussion are proposals from the European Commission for a legal framework to wind up or reorganise insolvent banks so as to avoid a repeat of the multi-trillion-euro taxpayer bailouts during the financial crisis.
Another suggestion is for the euro zone’s rescue funds to be allowed to recapitalise banks directly, rather than having to lend to countries for on-lending to the banks. But that is another idea with which Germany is uncomfortable. Having rallied on Tuesday, European stocks dropped 2.2 percent as investors priced in a lack of dramatic policy action. The euro tumbled against the dollar to its lowest since August 2010 and Spanish and Italian borrowing costs climbed.
A German two-year debt auction gave a stark illustration of how money is dashing for safe havens. Investors snapped up the 4.5 billion euros of paper on offer even though it came with a zero coupon – offering no return at all. With the euro zone registering no growth in the first quarter and threatening to slip back into recession, policymakers touted three ideas to provide stimulus:
- ‘Project bonds’ backed by the EU budget to finance infrastructure projects alongside private sector investment.
- Doubling the paid-in capital of the European Investment Bank, the EU’s co-financing arm, to a little over 20 billion euros.
- Redirecting structural funds which tend to flow to poorer countries, to other areas where they might reap more immediate growth rewards.
Even if all three proposals were to be activated quickly, economists say they will not provide a sufficient shot in the arm to the euro zone and the wider EU economy.
Claire Davenport and Luke Baker write for Reuters News Agency. Courtesy of Reuters news alerts.