Friday, March 26, 2010

Sarkozy saves the day at the European summit

There may be many captains currently manning the EU ship – Herman Van Rompuy as head of the European Council, Jose Luis Rodriguez Zapatero as holder of the rotating EU Presidency, Jose Manuel Barroso as Commission President, and Jean-Claude Junker as eurogroup Chairman – but it is French President Nicolas Sarkozy who’s managed to pull the eurozone back from the brink at this week’s European Council.

On Thursday morning, Germany’s Angela Merkel had still not agreed to meet her fellow eurozone heads of government to strike a deal on how to avert Greece’s potential default – without a humiliating intervention by the IMF –, but in a bilateral meeting just before the start of the European Council, Sarkozy concluded his energetic, week-long lobbying of Chancellor Merkel with a tightly-worded agreement on a support mechanism. In a coffee break later on, eurozone leaders were gathered together to approve the plan.

So what’s the deal?

The loan mechanism, which will only come into play should Greece make a formal request for support, would consist of a majority of bilateral loans by eurozone governments – calculated according to their capital weighting in the European Central Bank (ECB), making Germany the biggest contributor – and “substantial” IMF financing. There would be a unanimous vote of eurozone Members to disburse the loans - thus giving each a veto – and the mechanism would subject the receiving country to “strong conditionality” – relating to budgetary discipline - and assessment by the European Commission and ECB.

For Merkel, IMF involvement was a pre-condition for the deal and something of a political face-saver, given her staunch resistance to a eurozone support mechanism in the past weeks. ECB President Jean-Claude Trichet has called it a “workable solution”, but will privately not be happy with IMF involvement. Nor will Greece, which fears IMF demands for the dismissal of public sector workers or further pay cuts. In addition, another key part of the bargain for Merkel is commitment to stricter economic and budgetary surveillance as well as stronger enforcement mechanisms against profligate Member States. A new crisis resolution framework will also be put in place. To work out all the details of this tougher stance on fiscal discipline and crisis management, a taskforce will now be set up by Van Rompuy and the Commission, composed of Member State representatives, the rotating Presidency, and the European Central Bank, which will report by the end of this year.

The new bailout deal is also accompanied by a pledge to strengthen economic governance – vociferously championed by France - with proposals due to be submitted by the Commission to the next European Council in June. All in all, Sarkozy’s had a good couple of days and can return home as a European hero, following his disastrous regional election results.

The European Council also made a first general agreement on the EU’s new growth and jobs strategy, Europe 2020 – including a headline target to raise employment to 75% - while pushing back to June decisions on the more controversial targets on education and poverty reduction proposed by the European Commission. One key element – relating to the synchronization of coordination mechanisms of Europe 2020 with the Stability and Growth Pact so that moves towards greater fiscal sustainability are made compatible with growth initiatives – was rejected, largely because of Chancellor Merkel’s objections.

In addition, Europe’s leaders reiterated their climate targets and climate financing commitments, showing that, despite their humiliating marginalization in the corridors of the Copenhagen summit, they have not renounced their claim to leadership in negotiations for a post-2012 global climate framework.

Overall, the European Council managed to take the most urgent decisions to maintain the credibility of the EU and the euro, but essential questions remain unanswered on core European policies for securing economic recovery and generating new sustainable growth in the coming years.

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