By Vlad Grinkevich
The Stability and Growth Pact adopted by the participants in the recent EU summit provides for allocating an additional €120bn for stimulating economic growth and toughening control of the banking system.
Even though observers agree that the pact is the best EU leaders could do under the circumstances, it will only delay a solution to the main issue and is nothing but an attempt to gain time. Some experts say that “releasing the crisis” would be the best “remedy” for revamping the ailing economy.
The growth pact was adopted after days of talks as Spain and Italy bargained for better credit terms. Both countries are in the so-called ‘risk group’ and Spain’s financial system is causing a greater concern than the problems of Greece.
Markets responded with optimism to the adoption of the pact with shares going up sharply after reports about it came in. Nomos Bank analyst Kirill Tremasov comments.
“The decisions adopted by the EU summit come in handy, particularly with regard to granting loans to Spanish, and probably, Irish banks, from the Financial Stability Fund. This should ease Spain’s debt burden and boost investor confidence. The EU authorities must prevent the debt market from crumbling.”
Even though EU leaders managed to avoid a collapse, a solution to the EU debt crisis is nowhere in sight. The crisis can be overcome on condition there is a stable economic growth, which is not the case. The EU’s anti-crisis measures are to blame for this, Kirill Tremasov says.
“The EU governments are slashing budgetary expenditure to cope with the crisis. This measure is expected to maintain investor confidence. At the same time, it arrests economic growth. As a result, we face a vicious circle.”
The eurozone economy resembles a terminally ill patient who is on life-support with the doctors hoping that an effective remedy will appear before the tragic end. Experts believe, however, that measures to support the “patient” along with interim solutions prevent the EU leadership from focusing on the main issue – painful but unavoidable structural reforms. Igor Nikolayev of FBK’s strategic analysis department, comments.
“The crisis of the modern economic model will break out sooner or later, no matter how hard we try to suppress it. The ‘release’ of the crisis stipulates an effective solution on Greece, and the launch of reforms which would alter the current economic model. It’s better to go all the way than cutting it short.”
From time to time, EU officials acknowledge the need for tough solutions, such as excluding certain countries from the eurozone. However, they fear upheavals and lack political will. The eurozone, like the European Union, was established for political considerations and these considerations are still in place.