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Week Ahead: ways the eurozone could be fixed
We preview the main financial events of the coming week, when a key European leaders' summit is being held.
There are so many things that could be done to fix Europe. Ahead of the summit of European leaders on Thursday and Friday – the talking shop that has raised so many hopes for a resolution to the eurozone crisis – here is a run-down of the options on the table:
1. Banking union (creating of a centralised regulator, joint deposit guarantee fund, and unified liquidation scheme).
Is it likely? Concrete commitment is not expected; but long-term pledges are possible. There is uncertainty about whether EU treaties would need to be changed. Some of German chancellor Angela Merkel’s allies have rejected the idea.
2. The launch of eurobonds, communising nations’ debt, AKA fiscal union.
Is it likely? Likely to be discussed and popular with the French, Italians and Spanish. But German opposition to this idea has been strong.
3. A watered down version of eurobonds: eurobills or a ‘European Redemption Fund’
Is it likely? Merkel is said to have dropped her earlier opposition to the plan for a ‘Redemption Fund’ for eurozone members to mutualise debt over 60% of GDP – and jointly guarantee it. ‘Crucially, both eurobills and the ERF may get round the requirement for European treaty change and be acceptable to Germany’s constitutional court,’ wrote Steven Major of HSBC recently. Societe Generale analysts say this could be a ‘game-changer’.
4. The use of the ESFS/ESM rescue funds (the latter of which is yet to be actually ratified by all eurozone members – a German court may stand in the way) to buy government bonds from Spain and Italy, keeping yields down
Is it likely? This was proposed at the G20 summit of leaders in Mexico this week. But there are doubts over whether the plan will get support from leaders including Merkel, or whether the bailout funds are even big enough to carry out the plan. EU commission spokesman Amadeu Altafaj Tardio has described the plan as ‘financial paracetamol’, not tackling the root problems.
5. More growth measures to offset the strict austerity diet
Is it likely? This is the most likely outcome of the summit. Press reports suggest leaders will sign ‘a compact for growth and jobs’. Italian PM Mario Monti said on Friday afternoon, after a meeting with his German, Spanish and French counterparts, that the four want a growth package worth €130 billion. And Greece’s new coalition government may try its hand at starting re-negotiations over its bailout programme.
6. Serious action from the European Central Bank (ECB) to re-launch LTRO (the cheap long-term bank lending scheme), renew sovereign bond purchases through its SMP scheme, or become a lender of last resort. Or at least cut rates.
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