Europe should fight the recession

The European summit (28-29 June 2012) - the 19th held in an attempt to resolve Europe's economic woes- has met its expectations on short term measures to fight speculation but has fallen short  on growth measures. As one commentator said, one more summit but "the crisis rolls on". 

The most concrete outcome is the possibility for the European Financial Stability Fund (and then the new European Stability Mechanism) to intervene directly in banks . This is meant to respond to Spain's concern about soaring spread. The significance of this measure should calm the markets since banks will be bailed out collectively by all members of the eurozone and that losses will be shared in proportion to the size of each country (which means in theory that even Greek tax payers could participate in the rescue of Spanish banks!). As part of the agreement, there will be a “single supervisory mechanism involving the ECB”. That means that the ECB may intervene eventually as lender of last resort if funds from the EFSF dry out to deal with future banking crises. The agreement will be finalized by the end of the year to sort details out, so no direct aid to banks will be granted by then. In the meantime, the Spanish debt will increase by EUR 100 billion as a result of the bailout of Spanish banks and put the country at risk of default .

The second important decision is the "compact for growth and jobs" to complement the 'fiscal compact".  If we think about a big plan for Europe's recovery', we are simply wrong. The Council has come up with a plan of EUR 120 billion (equivalent to around 1% of EU GNI)  for fast-acting growth measures. The only concrete measure is an increase of EIB"s capital of EUR 10 billion - which means that its overall lending capacity will increase by EUR 60 billion. Project bonds will be launched as a pilot phase, to bring "additional investments  of up to EUR 4.5 billion for pilot projects in key transport, energy and broadband infrastructure ". The remaining funds come from Structural Funds which have already been allocated to the member States and which should be redeployed to support growth and jobs especially in lagging regions. 

The issue is whether this package of measures which will enter into force this year is sufficient to combat the recession in Europe. The answer is clearly no. In fact, the reaction of markets has been vigorous and spreads of Italian and Spanish bonds are soaring again dangerously. It is understandable that one summit could not resolve all issues on the table and that time is needed to coordinate these measures with other international partners. 

In fact,  the main lesson drawn from this summit is that European leaders have a deep misunderstanding of the economic crisis and about the policies which are necessary to tackle it. Economic history has taught us about success and failures of policies to end the crisis between the two world wars. Maybe they should get more inspired.

But, just one note of optimism. The foundations for the creation of a nucleus of a European federal State have been laid down. this means a more collective leadership for Europe. The United Kingdom, the most virulent opponent of this project has proposed a referendum on which British people should decide whether to stay in the European Union or not. It would be wrong to say that Germany has surrendered: its natural destiny is linked to a federal government of Europe. This is part of the solution to the crisis, not the problem. 

P.S: today, the Eurogroup will meet to flesh out the political promises of the EU council. It will obviously focus on Spain which has offered more sacrifices to get better bailout conditions. Will this calm the wrath of the God market? Personally I doubt.