Mixed signals from EU summit

European Union leaders at Wednesday’s informal EU summit have reiterated their desire for Greece to remain in the eurozone but also to “respect its commitments”, according to European Council President Herman Van Rompoy. However, leaders at the summit were divided over how hard a line to take with Greece and no agreement was reached over how to promote growth in the eurozone.

We can’t commit suicide because three per cent of the eurozone is not performing. We must do more to support Greece- Anthony Manduca

On the other hand, member states were told to prepare contingency plans in case Greece quits the single currency, something I am sure most EU countries have already done, or at least they should have done.

Nobody expected this latest EU gathering to take any decisive action in connection with either Greece or the eurozone; it was, after all, an informal summit – the first such meeting for newly-elected French President François Hollande – and a formal summit of EU leaders will be held in late June, soon after Greece goes to polls.

Van Rompoy did say that there was agreement on the need for economic growth as well as measures to restore financial stability in the eurozone, which he described as “two sides of the same coin”.

UK Prime Minister David Cameron echoed a similar message when he stated: “There was complete agreement that dealing with deficits and getting growth are not alternatives, they go together. You need to do one in order to get the other.”

Van Rompoy and Cameron are both right, of course, when they talk about financial sustainability and the promotion of growth going hand in hand, and this is certainly the policy the Maltese government has adopted (with successful results) ever since the global financial crisis erupted a few years ago.

However, nothing concrete was decided at this summit, a number of differences re­main­ed between EU leaders on the way forward and the meeting failed to boost market confidence. The day after the summit the euro fell to $1.2515 against the dollar, a 22-month low.

EU leaders began their summit divided over whether eurobonds should be launched as a way to help ease the eurozone crisis. Eurobonds are government bonds which would be collectively guaranteed by all eurozone member states rather than by a single government.

The argument in favour of eurobonds is that all governments would be able to borrow at the same interest rate. France is the main supporter of the establishment of eurobonds, a position backed by Italy, Spain and the European Commission.

German Chancellor Angela Merkel, however, is opposed to eurobonds because she is worried this would encourage countries like Greece and Spain to borrow and spend more freely, thus making their debts even bigger and more unsustainable. Ultimately, it will be the German taxpayer who would have to pay for the debt of the big-spending EU states.

Also, eurobonds may make it more expensive for Germany to borrow because markets may consider the eurozone as a whole to be a more risky borrower than Germany on its own.

So it looks like the idea of eurobonds will be shelved for now, although one possible compromise could be the issuing of project bonds – something proposed by the European Commission – in which borrowed money would be spent on infrastructure and growth-enhancing investments throughout the EU.

Such bonds would be similar to eurobonds in the sense that the EU member states are collectively bound to support the Commission and make sure it can repay the debts, but the amount of money involved in project bonds would be far smaller than the money borrowed for eurobonds.

It seems like the election of French President Francois Hollande has helped the EU focus more on job creation and economic growth in addition to austerity measures and deficit reductions. This is certainly positive – as long as supporting growth does not come at the expense of reducing debt – which is basically Germany’s position, and certainly an understandable one.

Wednesday’s summit was characterised by differences of opinion between Merkel and Hollande, in contrast to previous meetings when the German Chancellor and the then French President, Nicolas Sarkozy, saw eye to eye on how the eurozone crisis should be resolved. How much common ground can be reached between the two leaders by the time the June summit is held remains to be seen.

However, it is likely some sort of deal will be reached at next month’s meeting, and the German and French leaders understand the importance of such an agreement and of the partnership between their two countries.

EU leaders are expected to take some concrete steps to encourage economic growth, including an agreement on project bonds, deploying unused EU structural funds, boosting the capital of the European Investment Bank to help small businesses and deepening the EU internal market.

Even though France’s position on tackling the crisis is perhaps gaining ground within EU circles, Germany’s economic track record undoubtedly gives it the moral authority to remain the leading player in tackling the eurozone crisis.

Furthermore, it is likely that Hollande’s differences with Merkel at this stage are partly due to next month’s National Assembly elections in France in which he needs to win a parliamentary majority.

The German-backed austerity measures in the EU are not popular in France, so Hollande needs to take note of public opinion. Once he gets his parliamentary majority, he will be in a better position to compromise.

Some additional help for Greece might also be on the cards at June’s EU summit, but this will depend on the results of the Greek election. The mood within EU circles is that while Greece needs to continue with its austerity measures, it mustn’t be allowed to bring down the eurozone.

As an Italian diplomat was quoted as telling the Financial Times: “We have to work hard to change the way we are handling the Greek crisis. We can’t commit suicide because three per cent of the eurozone economy is not performing. We must do more to support them.”