Full analysis of the outcomes of the July 21 Summit

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The smiles in front of the cameras do not conceal the fact that no real solution
to the spiraling EU crisis was delivered. Image Source: EU Observer
UPDATE (October 28): See Full Analysis: The aftermath of the October 26 Euro Summit

Yesterday’s (July 21) EU summit is over. The final outcome of the nine-hour meeting has been received with optimism by most commentators and by the markets. Though there are a number of points that are vague and misleading, while there are others that are established upon a false logic.

The original decision of yesterday’s summit, a mere four page document is filled with promising rhetoric that however conceals the very fact that the actions that were decided to be taken from now on are nothing more than yet another ad hoc plan that fails to address the crisis in all its three facets and it fails to address it as a systemic problem. To see why yesterday’s summit did not produce a real solution to the crisis we need to review the final document. I shall be quoting phrases and paragraphs from the document and then commenting upon.

Starting from the introductory paragraph the document writes as follows (text that appears underlined, is done by myself – on the original document, no phrases are highlighted):

We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures.</p>

They talk about reforming rules. What rules have been reformed? The only measures that were not included in the treaties are the bailouts in the form they took. Apart from that no reform has taken place. The problematic structure of the euro has remained untouched. The banking sector is still poorly regulated. There is no mechanism or institution responsible for redistributing the surpluses in the eurozone to achieve balanced growth euro-wide and convergence. None of this has been done so this first phrase is completely devoid of any real meaning.

They then make mention to “recovery” that is “well on track”. This is a complete lie. There is no recovery in the euro area. All that is, is contagion and deepening of the crisis. Greece has been doing worse than what was originally expected, with the first bailout. Portugal and Ireland recently received “junk” status ratings, that reflects the deepening of the recession there, while Italy and Spain are now borrowing from the markets with interest rates that are on the border line. It is because there is no recovery in the euro area that the summit was held yesterday. If there was recovery, there would be no real problem, the threat of the crisis spreading to Italy, Spain, Belgium and France would not exist and the summit would not be necessary.

So far from the very first paragraph of the document we realize that the rhetoric that is used is to deceive people, to make them think that everything will be fine. It is the same sort of discourse that politicians used back in 2001 when Greece adopted the euro. The same when Greece was given the first bailout, the same when Ireland and Portugal were bail out as well.

2.We agree to support a new programme for Greece and, together with the IMF and the voluntary contribution of the private sector, to fully cover the financing gap. The total official financing will amount to an estimated 109 billion euro. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute to the financing of the new Greek programme. We intend to use the EFSF as the financing vehicle for the next disbursement. We will monitor very closely the strict implementation of the programme based on the regular assessment by the Commission in liaison with the ECB and the IMF. </p>

3.We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We also decided to extend substantially the maturities of the existing Greek facility. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme.

Those two paragraphs basically admit that the original bailout to Greece, with its high interest rates and short payment period, was impossible to cover. The results from this decrease in the interest rates and the extension of the maturity of the loans (payment period) is both good and bad. It is good because it becomes more affordable for Greece to cover its responsibilities. It is bad because not a single euro will be cut from the creditors, because the “voluntary contribution” practically means that no real “haircut” will be imposed on them (around 21% of current face value). In that sense the amount of the real debt is not really reduced. Any reduction that will come will be ancillary compared to the whole amount and will derive from the decrease in the interest rate.

So Greece is still faced with an enormous debt and still its creditors are in a position to impose a “strict implementation of the programme”. That implies that if necessary (or most probably) new stricter austerity measures will be imposed on the Greek people so that the creditors can rest assured that the programme goes as planned and their money is safe.

6.As far as our general approach to private sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.</p>

7.All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.

European leaders were quick to point out that Greece is “an exceptional and unique solution”. This underlines two things. First that the second bailout to Greece is in fact the cheapest way to save Italy and Spain. Second that the decisions that were taken yesterday do not fall within a well-worked, long-term, system-wide strategy, but constitute yet another ad hoc measure, just like all the previous ones that have proven to be failures. As long as the failing practices of these narrow, ad hoc measures are not abandoned more summits and more “exceptional and unique” solutions will be needed.

As for the mention that is made to the credibility of the signatures, all I have to say is that those same signatures were put on the first bailout to Greece and had no real effect. Similar signatures were put on the document that brought Greece into the euro despite the fact that the country failed to satisfy the conditions for accession. Moreover, who really trusts the signatures of leaders that act without a strategy and who believes in the commitment of states, who receive bail outs to avoid default or who are outside the door of a bailout mechanism? Only those who wish to be fooled.

8.To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to increase their flexibility linked to appropriate conditionality, allowing them to:
– act on the basis of a precautionary programme;
finance recapitalisation of financial institutions through loans to governments including in non programme countries ;
– intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a  decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion.
We will initiate the necessary procedures for the implementation of these decisions as soon as possible</p>

What derives from this is that the EFSF (European Financial Stability Facility) will in fact be given the powers to refinance banks, taking the role of a central bank. There are provisions allowing the EFSF to intervene in the secondary market to buy back bonds. This is positive, but the inclusion of the phrases “existence of exceptional financial market circumstance” and “mutual agreement”, sound to me way too bureaucratic. If the EFSF is not allowed to act independently thus saving valuable time, then there is no real point in allowing it to intervene in the markets, were “time is money” in the absolute sense. Being slow in the financial markets means being on the losing side.

13.We call for the rapid finalization of the legislative package on the strengthening of the Stability and Growth Pact and the new macro economic surveillance. Euro area members will fully support the Polish Presidency in order to reach agreement with the European Parliament on voting rules in the preventive arm of the Pact.</p>

Strengthening the Stability and Growth Pact (SGP) without revising the structure of the euro is self-defeating, since the real problem in the eurozone is that there is no coordinated fiscal policy. There are no fiscal transfers that would allow for the re-distribution of surpluses, in order to prevent asymmetric shocks and to achieve balanced growth. All that the SGP will do is to “harmonize” nominal economic indexes, who all accept are not the best measures. Every single individual who knows the basics about “Gross Domestic Product – GDP” knows that it is far from an accurate measure. The viability of the single currency cannot be based upon such nominal indexes. Real convergence can only be achieved through a Monetary Union combined with a Fiscal Union, or at least a coordinated fiscal policy.

15.We agree that reliance on external credit ratings in the EU regulatory framework should be reduced, taking into account the Commission’s recent proposals in that direction, and we look forward to the Commission proposals on credit ratings agencies.</p>

This discussion about the “bias” of credit rating agencies is ridiculous, populist and has nothing to do with the real problem. The credit rating agencies are threatening to downgrade the USA, if an agreement on the debt ceiling is not reached. If they do so how will Mr. Barroso justify his groundless rhetoric of “biased” credit rating agencies? A European rating agency will not solve the real causes of the crisis. It will only fuel speculation, as no one will really trust it when it comes to European matters. It will be biased (the real bias – not the one Mr. Barroso understands) in itself in favor of Europeans.

This was basically the document that has been published on the official website of the Council of the European Union. I hope you found this analysis useful and insightful. I have said everything so I do not need to repeat myself. All I have to say is that in general, all EU decisions and documents use an exceptionally positive discourse that almost always conceals serious weaknesses and lack of real intentions to deal with the issue in question. The above document is yet another piece of nice “proper” language that is seemingly full of positive points. My analysis proves the opposite.</div>

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