Spain, Italy, Germany Come to Deal after Euro Summit

Nicholas Iaquinto

Nicholas Iaquinto was previously the Communications Coordinator / Web Developer at AICGS.

Signaling a new direction in Europe’s efforts to stem the sovereign debt crisis, Germany, Spain, Italy, and other euro zone member states reached a deal to recapitalize Spanish banks with European Financial Stabilisation Mechanism (EFSM) funds. Concerned that adding to their debt would burden the state with further increased borrowing costs, Spain and other states will now have the option to bailout their banks while neither adding to their debt, nor creating euro zone-wide debt (through the infamous eurobond concept). Although it is a significant concession from Germany, this resolution comes as an overall relief for many politicians and investors, who have ensured an associated uptick in financial markets and Spanish and Italian bond sales. This relief is particularly salient in the wake of Merkel’s exclusion of eurobonds for “as long as [she] lives,” which carries an uncharacteristically strong finality on the subject. Accordingly, this decision was not an easy process and political leaders toiled in an over fourteen hour overnight session to reach this negotiated outcome; however, diplomacy and pragmatism have won out, at least today.

Indeed, these measures are not a complete solution to the debt crisis. Set to be implemented by July 9, the plan to fund Spanish and other banks that meet the criteria will have to transition to the European Stability Mechanism (ESM) when it replaces the EFSM. Furthermore, Germany and other European states will have to contribute additional funds in the future. Thus, this plan is more of a stalling mechanism than a solution. Fortunately and of more importance in the long term, an additional measure of this decision creates a new banking supervisory agency that has the power to supersede similar state agencies. In important step forward toward fiscal union, shifting more control of the banking sector also alleviates Germans’ concern about the potential for states to engage in further questionable regulatory practices that facilitated the crisis.

A short-term concession, but long-term advantage, this measure, however, still must pass the court of popular opinion, particularly the approval of the IMF and World Bank, which both recently warned of impending consequences for inaction. In this sense, the question that remains is not only how long will these measures delay a further down slide, but also how far is Germany willing to move toward fiscal union to solve this crisis?

 

Further Reading

The Washington Post: Spain, Italy win major concessions from Germany at debt summit

The New York Times: Europeans Agree to Use Bailout Fund to Aid Banks

Financial Times Deutschland: Gipfeltreffen versetzt Finanzmärkte in Feierlaune, Berlins D-Day – worum es geht

Die Welt: Die Schleusen auf! Das bestürzende Gipfel-Ergebnis

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.