ANALYSIS:EU leaders are hoping for 'grand bargain' to help the euro zone's weakest states but the markets are not so confident, writes ARTHUR BEESLEY
AS THE EU summit kicked off last night, Taoiseach Enda Kenny was observed chatting in a huddle with his Greek and Portuguese counterparts. The image of the trio was stark, and was emphasised by the arrival into their company of German chancellor Angela Merkel.
So it was that EU leaders embarked on final talks on a new “grand bargain” for the euro zone. Billed as the moment at which Europe was supposed to finally pull out of the sovereign debt crisis, the summit took place only hours after the collapse of the Portuguese government and amid lingering anxiety about the size of the bailout burden on Ireland and Greece.
At a press conference before EU leaders arrived in Brussels, European Council president Herman Van Rompuy suggested the union was now poised to turn the corner for once and for all. This hopeful rhetoric, however, is clearly in contrast with the unremitting volatility in the sovereign debt world.
“It’s very obvious from what’s happening on the markets that there’s still far from confidence that this strategy is actually working,” said a senior European diplomat. Although some of the pressure on heavily indebted countries such as Spain, Italy and Belgium has abated in recent weeks, Portugal’s desperate attempt to avert a bailout demonstrates the relentless force of the turmoil.
No matter how strongly they say it, the EU institutions have yet to win over the doubters that they will prevail in the endeavour to shore up the euro’s weakest members. In the tumultuous period since the Greek firestorm engulfed its partners, the gradualist response has brought only temporary respite in a steadily worsening panorama.
When Greece fell over in May, the creation of a bailout fund was designed to prevent anyone else following suit. When Ireland dropped in November, the idea of a comprehensive response was taking hold. Some believed the delivery of that initiative might forestall disaster in Portugal, but prime minister José Sócrates stood down on the eve of the all-important summit.
At one level, this drama is about political will on the European stage and political reality on home ground. Thus did Finnish jitters over reforms to the temporary bailout fund and German prevarication over capital injections into a new permanent fund, lead to last-minute haggling over the shape of the final deal.
This feeds too into limitations over the scope of the deal itself, in which the measures fall well short of the radical programme mooted only weeks ago.
The temporary fund will not buy sovereign bonds at a discount; and the permanent fund will not intervene in secondary bond markets. This forestalls the prospect of debt restructuring, something many analysts hold to be inevitable, and leaves the European Central Bank with exclusive powers to unilaterally support ailing countries when they come under pressure. With Irish bond yields above 10 per cent and those of Greece above 12 per cent, the investors who actually provide the money for the debt markets to function remain to be convinced that the proper solution is at hand.
Senior European officials say the shape of the arrangement reflects the limitations of political feasibility at this time, a fair point. But those very limitations only fan the sense that the grand design is not grand enough.
Tougher governance rules and a new pact to reinforce the competitiveness of euro countries are forward-looking initiatives, designed to prevent a repeat of the debacle.
They do little, however, to help clean up the mess after a dizzy debt spree went badly awry. The problem has not gone away. The battles continue.