It was only 40 days ago that eurozone leaders triumphantly agreed on a package to solve the sovereign debt crisis and, yet, they meet again over the next two days to find another solution. Kurt Sansone asks why.
Q. Why are EU leaders holding yet another summit?
A. The agreement reached in the last summit in October has failed to calm the markets.
Since then Italy, the eurozone’s third largest economy, has reached the precarious brink of insolvency as interest rates on 10-year government bonds have shot up to seven per cent, increasing the country’s borrowing costs. Its predicament has forced it to appoint a technocratic government.
Q. Haven’t other eurozone countries been bailed out before? Why is Italy more problematic?
A. Italy has debt that runs into trillions of euros at 120 per cent of the country’s economic output. The European bailout fund, even in its expanded version as agreed in October, will not be enough to support Italy if it falters.
In the last week of January, Italy has €33 billion of debt coming up for redemption and a further €48 billion in the last week of February. If Italy defaults on these payments it will go down the same road of Greece.
The prospect of this happening is high unless market confidence is restored by the new Italian government’s resolve to pass a raft of austerity measures.
Q. Will austerity measures in Italy suffice?
A. No. They will go a long way to restore market confidence but they will not be enough because the markets want a eurozone-wide solution to the problems faced by the individual countries that use the euro as their currency.
Q. Will the summit produce a solution?
A. It seems unlikely the EU’s 27 leaders will reach any form of deal tomorrow. But watch out for the following day’s summit of the 17 eurozone member states. If a solution is found, it will be on Friday.
Q. How likely is it that eurozone leaders agree on a lasting deal?
A. It all depends on how politicians perceive risk. They will have to seek a balance between the risk of financial and economic disaster if no or little action is taken and the political risk associated with the lasting solutions being proposed, which will impinge on national sovereignty.
Q. What are these solutions?
A. French President Nicolas Sarkozy and German Chancellor Angela Merkel laid out the groundwork this week when they agreed on a new EU treaty to be in place by March 2012.
Although details of the treaty are unknown, they want it to include tougher budgetary rules that foster greater integration. They know that speed is of essence and have proposed the treaty apply for the 17 eurozone member states if an EU-wide agreement is hard to reach.
Mr Sarkozy and Ms Merkel want harmonised golden rules – on deficit limits and balanced budgets – for eurozone countries and to give national courts the competence to impose legal restraints on governments that break them. The European Court of Justice will also be tasked to examine whether the golden rules conform to European demands.
Q. What political risks do these proposals carry?
A. Eurozone countries would increasingly give up more sovereignty over national budgets as the bloc heads towards a fiscal union. Germany and France do not want to bail out profligate eurozone member states without ensuring that governments there would not be able to embark on politically-convenient spending sprees that cause debt.
Losing sovereignty over the national budget carries a big political risk for any party in government, especially in countries where such a move can give the generally Eurosceptic far-right movements electoral fodder. A worst case scenario can even see some countries leave the EU if integration is perceived as usurping democracy.
Q. Does this mean that income tax and VAT in Malta will be set by Brussels?
A. No, but setting up a fiscal union and tighter budgetary controls by Brussels is a precursor to tax harmonisation. Even if taxes are not harmonised, greater budgetary controls will give finance ministers little room for manoeuvre, especially if the EU Commission’s proposal to scrutinise budgets before they are actually approved by national Parliaments goes through.
Q. Why are Mr Sarkozy and Ms Merkel calling the shots?
A. France and Germany are the eurozone’s largest economies with triple A credit rating. They are expected to fork out the bulk of the money when eurozone countries are bailed out.
The underlying argument is that if French and German taxpayers are expected to foot the bill for the Greeks, the Irish, the Portuguese and others, it is only fair that they have a bigger say in how these countries manage their finances.
Still should they be calling the shots in a 17-member bloc made up of sovereign states?