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The European Summit Explained

12 Dec

EU leaders met at the European Union summit last week to discuss how they could make progress and avoid Europe falling into a similar debt crisis in the future. Here’s a run down of what happened and what was said.

Some of the measures were simply put in place to put a stronger emphasis on existing fiscal rules that are currently being loosely followed. At present, there is a measure set in place that states if a country reaches a certain amount of debt, they are issued a fine. Yet so far, no countries have been fined.

On Friday leaders discussed a stronger enforcement on this rule, meaning “there will be automatic consequences” for countries who exceed the deficit limit of 3% gross domestic product.

This rule will be made possible through communication between the EU countries – if the European Council agrees that an EU country is breaching fiscal rules, the country could be forced to put a deposit into escrow.

Another fiscal rule outlined at Friday’s summit is that countries must pledge balanced budgets, and will be issued with automatic corrections if they breech the terms.

This would mean if a countries structural deficit breaches 0.5% of GDP they would face automatic consequences. A “debt-brake” puts a cap on public debt according to structural deficit, which means it is adjusted for the business cycle, taking economic boom and bust into account.

The details surrounding this rule are currently rather hazy; whilst Germany currently has a “debt-brake” implemented, it has not been decided what each country’s amount would be, and this must be decided by the EU’s high court.

What’s more, although Germany has a similar measure already in place, they did not manage to prevent it from exceeding the 3% deficit ceiling last year. It is hoped with tighter rules, countries will have to work alone in order to reach their targets, with no oversight from Brussels.

Whilst the general feeling amongst government leaders is that Friday’s plan was a step in the right direction, there are still problems that need ironing out.

John Lonsky, chief economist for Moody’s Analytics’ Capital Markets Research Group said: “There’s been progress, but this is not enough to constitute a satisfactory resolution.”

One of the measures was for eurozone states to provide up to 200billion euros in loans to the International Monetary Fund to help tackle the crisis, with 75% of the money coming from the 17 countries that use the euro.

Lending to the fund has been unpopular amongst IMF shareholders who are wary of sending large amounts of money to Europe.

It was agreed that the 500billion euro European Stability Mechanism bailout would go into action next year. It has been speculated that this would be combined with the 400billion euro European Financial Stability Facility currently in place, but governments have decided that the two will not run alongside each other.

Germany fronted the approach of implementing a new pact that would give the changes a stronger legal force. This would make it easier for EU authorities such as the European Court of Justice and the European Commission, to enforce them.

But not all countries were too keen on this measure – the UK refused to back the change, which means up to 26 governments, including 17 euro countries, will form their own separate agreement.

This led one German daily paper, the Süddeutsche Zeitung, to believe the outcome posed as a victory for Chancellor Angela Merkel. The front page of their weekend paper read: “Merkel succeeds – Great Britain isolated.”

Charles Grant, director of the pro-EU Centre for European Reform said: “Britain is as isolated as it’s ever been in the 25 years I’ve been following the EU. If I had to put money on it now, I think Britain will leave the EU in the next 10 years.”

Now Friday’s summit is over, eurozone governments await the outcome of Standard and Poor’s review, which could pose potential downgrades for triple-A countries.