Last week’s EU summit was without doubt a huge success as Europe struck a detailed deal – perhaps unexpectedly – to help Spain and Italy pull through the eurozone crisis. Europe’s leaders also agreed to a package of measures to promote growth, worth about €120 billion.

What was at stake was Europe. That’s who won- François Hollande

Had a political agreement not been reached between the member states it is likely that the eurozone crisis would have greatly escalated and we would have had a summer of political and economic turmoil. Europe therefore avoided a major catastrophe, even though more will have to be done in the long-term.

German Chancellor Angela Merkel, to her credit, played a key role in making an agreement possible, and deserves praise for agreeing to reach a compromise with her fellow European partners, in spite of a potential political backlash back home.

Italy and Spain had insisted on measures to ease their debt problems as their borrowing costs had reached unsustainable levels. A sovereign default by these two countries would have caused the eurozone to collapse and there is no way this was going to be allowed to happen.

The summit therefore agreed to change the lending rules for the eurozone bailout funds. The temporary bailout fund, the European Financial Stability Facility, and its permanent successor, the European Stability Mechanism, will now be able to pump money directly into banks, without having to go directly through governments, and avoid increasing a country’s sovereign debt. When, for example, €100 billion was made available for Spanish banks, it increased the Spanish government’s debt considerably, and the markets responded accordingly.

The ability of these bailout funds to directly capitalise banks is a very positive move, but only time will tell whether the €500 billion allocated to the European Stability Mechanism will be enough to support the eurozone’s banks.

EU leaders also agreed that the European Stability Mechanism could buy government bonds and thus keep down a country’s borrowing costs. Furthermore, the summit agreed to ease the terms of help for countries in need. In future, any country needing aid while trying to follow the EU’s budget rules will not have to accept stringent austerity measures, like in the case of Greece.

There will be no ‘troika’ of officials from the EU, IMF and European Central Bank to oversee the economic reforms that need to be carried out. A memorandum of understanding will have to be signed, but the conditions imposed will not be as hard as in the past. It will be interesting to see how this works out in practice, and is a major concession agreed to by Germany.

In a major step forward towards the creation of a European banking union, it was also agreed that a single European level bank supervisor is to be established for all eurozone banks, greatly increasing the power of the European Central Bank.

This is definitely a positive step and should increase accountability with European banks and help reform this crucial sector which is at the heart of the eurozone crisis.

European leaders also have the go-ahead to a €120 billion stimulus package for the European economy, something which had been already agreed to a few days before the summit by the leaders of the eurozone’s four largest countries, France, Germany, Italy and Spain. French President François Hollande was instrumental in getting this package through.

The money includes a €10 billion boost in capital for the European Investment Bank, the reallocation of some unspent EU regional funds and the establishment of ‘project bonds’ for major infrastructural improvements.

Project bonds consist of borrowed money which will be spent on infrastructure and growth-enhancing investments by the European Commission. EU governments will be collectively bound to support the Commission and make sure that it can repay the debts.

For the long term, EU leaders agreed on a number of principles for a closer fiscal union, but postponed taking any specific measures – mainly because many countries, including Malta, have serious reservations over this – until a study due in October.

No decision was taken, for example, on the idea of jointly issued eurobonds, opposed by Germany but supported by France, European Council President Herman van Rompuy and the European Commission. A eurobond would operate in the same way as a government bond, except that all the 17 eurozone member states would collectively guarantee the debt rather than a single government.

Prime Minister Lawrence Gonzi also made it clear that Malta had serious reservations over the European Commission’s proposal for more EU control over taxation, as well as two of its six country-specific recommendations for Malta, namely the raising of the retirement age and a change to the cost of living adjustment mechanism.

On the whole this was a very good summit, even though the eurozone crisis is still not over and the Italian and Spanish economies remain shaky. But at least action has been taken and tomorrow eurozone countries will agree to give Spanish banks rescue loans and also allow the current, temporary European bailout fund to directly purchase Spanish government bonds. It will be interesting to see how the markets react.

The summit was also a victory for Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti who were facing dire financial situations at home.

It is interesting that President Hollande claimed to play the role of mediator at the summit instead of teaming up with Germany as France usually does. “No one can say I won or I lost,” he told the media. “What was at stake was Europe. That’s who won.”

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