Experts Warn Eurozone Deal Is A ‘Promise’

By Svetla Dimitrova

Although financial markets reacted positively to the surprise deal reached by eurozone leaders last week, many analysts were quick to note that it is too early for “trumpet-calls.”

The agreement concerning ailing banks was “still a decision in principle that would enter into force at the end of the year, after the needed legislative changes,” George Angelov, senior economist at the Open Society Institute in Sofia, told SETimes.

“It looks to me more like a plan for future action within a long-term strategy for economic integration — ie, we are talking about a promise. It is yet to be seen if that promise alone will foster stability, but I doubt it.”

The deal, reached early Friday (June 29th), provided for the direct recapitalisation of ailing banks from the bailout funds for the euro area, without leading to an increase in government debt.

That, eurozone leaders stressed, would only become possible once a single banking supervisory body, involving the European Central Bank, is set up for the 17-nation club, which is expected to happen by the end of the year, taking it a step closer to a banking union.

Asked if Friday’s deal would prevent a further deepening of the crisis in the eurozone, Georgy Ganev, programme director for economic research at the Sofia-based Centre for Liberal Strategies, said “No one can say.”

“It all depends on whether the markets will take this decision as credible and a good one,” he told SETimes. According to him, the move had its “pluses and minuses,” but was a logical one in the context of the creation of a banking union.

The use of direct financing from the European Financial Stability Facility (EFSF) — the current rescue fund, or its successor, the 500 billion-euro European Stability Mechanism (ESM), due to start operating in July — will hinge on countries’ compliance with EU budget rules.

“We are opening the possibilities for countries that are well-behaving to make use of financial stability instruments, the EFSF and ESM, in order to reassure markets and get again some stability around some of the sovereign bonds of our member states,” European Council President Herman Van Rompuy said on Friday.

The big question now, Ganev said, is what psychological effect the deal will have on markets and whether the initial optimism the deal prompted will prove sustainable, or will give way to depression again, as it has done in the past.

Shortly after the start of the summit, EU leaders approved a 120 billion-euro growth and jobs pact, aimed at stimulating “growth, investment and employment and improve Europe’s competitiveness,” according to Van Rompuy.

Under the plan, the capital of the European Investment Bank will be increased by 10 billion euros, which will expand its overall lending capacity by 60 billion euros. In addition, 55 billion euros of unspent structural funds will be redirected to countries worst affected by the crisis and project bonds worth 5 billion euros will be launched for initiatives in energy, transport and broad-band infrastructure.

“By itself, the package will not suffice, but it will certainly help,” Josef Janning, director of studies at the Brussels-based European Policy Centre, told SETimes. “The resources need to be turned into investments, which need to be based on projects. This package is specifically designed not to just inject money into the struggling economies. Therefore the impact of the growth plan will also depend on the ability of member states to absorb the funds constructively.”