x Abu Dhabi, UAEMonday 22 January 2018

Markets lukewarm as EU summit fails to break ground on debt

Key message of talks is Germany now firmly in the driving seat.

AMSTERDAM // Markets and observers yesterday gave a tepid reception to the meagre results of Monday's summit of European Union leaders in Brussels on the bloc's on-going financial and economic crisis.

Its one clear message was taken by many to be that Germany is now firmly in the driver's seat in Europe, although Berlin had to backtrack on its plan to put debt-wracked Greece's economy under direct EU-supervision.

The talks in Brussels confirmed previously agreed initiatives but held out no new solutions for stabilising the euro single currency and brought no news on Greek debt relief talks with private investors.

A discussion on boosting the emergency fund for heavily indebted countries was postponed until March in what was widely seen as a bow to Germany, which has to make the largest contribution.

In Europe and Asia, investors initially signalled some relief at another incremental step towards greater budget discipline across the European Union. The leaders of 25 of the bloc's 27 countries agreed to a set of rules for limiting national deficits and debt, known as the fiscal pact.

The pact had been agreed in December on the insistence of Germany and the rules had been drawn up in record time to help restore market confidence.

It is set to be signed at the next summit, in March, but it still needs to be ratified by the individual countries' parliaments in what could be a drawn-out and messy process.

While the fiscal pact was accepted almost unanimously, it was not embraced enthusiastically because it is seen as imposing austerity at a time when many countries are facing the prospect of a recession.

A number of leaders emphasised the need to increase spending to stimulate growth and limit rising unemployment but the summit did not agree on any concrete steps.

The pact was seen mostly as a sop to Germany, at the moment the strongest economy in the bloc and the largest contributor to emergency funds to help combat what is regarded as still the most pressing problem: the high public debt of several countries, such as Greece, that are on the brink of default. Portugal was also seen to be approaching the point where it would need a second EU bailout.

"The reason why most governments signed up to this [pact], despite having very strong reservations about it, was because they thought it was a necessary evil in order to persuade Germany to move on other fundamental problems," said Simon Tilford, from the Centre for European Reform in London. Only Britain and the Czech Republic opted to stay out of the pact.

Apart from putting up more money for the new emergency bailout fund, the European Stability Mechanism that will now start in July instead of next year, the other countries also want Germany to be more flexible on allowing the EU to take on more of the member countries' debt, either through the European Central Bank or by issuing EU bonds.

But Mr Tilford was pessimistic on the German willingness to do much more. The divisions in Europe were highlighted yesterday by new unemployment rate numbers, with Germany's falling to 6.7 per cent, a 20-year low, and crisis-hit Italy's rising to 8.9 per cent, the highest point since it started collecting the data in this form in 2004.

Germany has taken a very tough line on countries that it perceives as having lived beyond their means, such as Greece.

Before the summit, leaks from Germany revealed that Mrs Merkel's government was thinking of proposing to put an EU commissioner in charge of the Greek economy in exchange for 130 billion euros (Dh629) in debt relief.

The country needs part of the funds by March.

Greece's possible inability to repay its debts remains a threat to the euro single currency in which 17 of the EU's 27 members participate.

The Greek reaction to the German plan was furious and other European leaders did not agree either with such a far-reaching infringement of a member state's sovereignty.

But German dominance of the bloc's economic, and now also political, agenda was not disputed at the summit, as the other two European heavyweights stayed on the sidelines. Britain does not participate in the 17-member euro single currency or in the new 25-member fiscal pact, and prime minister David Cameron kept a relatively low profile this time, in contrast to his threatened veto of the fiscal pact in December.

France is now seen as having been economically weakened by the downgrading of its debt rating in January.

"At the moment the Germans are setting the agenda, although they are allowed to set the agenda by France, Italy and Spain," said Mr Tilford.

He cautioned that Germany's economy is not as strong as many are now making it out to be and that its influence could be challenged if, and or when, the economic pain in France, Italy and Spain requires them to diverge from Germany's fiscal austerity path.


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