In the end, it was neither a bazooka nor a breakup. Those who expected more drama from the euro zone summit may find the potentially far-reaching fiscal reforms agreed by its leaders rather pedestrian. The long-term plan does not address investors’ immediate concerns about some countries’ debt burdens. But, together with improved bailout resources, and the European Central Bank’s support of the banking sector, the package could give governments time to prove they have become serious. If, that is, they start implementing the plan quickly.
The drama was provided by the United Kingdom, which refused to agree to changes to EU treaties that would have strengthened the reforms. It now risks isolation, as the euro zone’s core 17 members are joined by the nine remaining EU states in drafting a new intergovernmental treaty. Two of the agreed reforms will deeply reshape the monetary union over time. First is the pledge to enshrine budget deficit limits in national constitutions, with ultimate supervision by the European Court of Justice. Second is acceptance of quasi-automatic sanctions for countries that don’t comply. Bringing forward the European Stability Mechanism to mid-2012, allowing it to take some decisions by a majority vote, and doing away with its ill-judged disposition to imposing haircuts on private creditors, are also good ideas. The total amount of bailout money will remain capped at 500 billion euros, as Germany wants, but the door is open to a reassessment next year. Finally, the International Monetary Fund will get an extra 200 billion euros.
Investors are yet to be convinced. Yields on 10-year Italian government bonds, for example, are back around the psychological 7 per cent threshold. But provided that euro zone governments move quickly to flesh out the details and implement the reforms, they can hope markets will get the message over time. There will be other crises. Portugal might need more bailout money, and Ireland too. Italy can’t afford to waver in its reform effort, and Spain’s new conservative governments must still deliver the goods it promised during the electoral campaign. A severe recession would make national deficits worse, and necessitate more ECB loosening. At least it looks as if ECB president Mario Draghi is happy the euro zone came up with the “fiscal compact” he had called for. In the days to come this happiness could help soothe markets more than governmental pledges and promises, however serious they are.