ANALYSIS:EU leaders are hailing the bailout scheme overhaul but ECB chief's warnings show market stability is far from a fait accompli, writes ARTHUR BEESLEY
EU LEADERS cast the overhaul of their bailout scheme as a landmark initiative in the sweep of history to finally settle restive markets. Really? They left Brussels with warnings in their ears from European Central Bank (ECB) chief Jean-Claude Trichet that the grand effort was unlikely to restore confidence in sceptical markets.
The ECB has been arguing for months that the combined measures should go further and deeper, but its warnings went unheeded as euro governments pulled back in recent weeks from the most radical reform proposals. Although a source briefed on the talks said Trichet’s intervention left many European leaders “glum”, they did not show it outside the summit room.
“I would like to highlight the very important, I would say historic, conclusions of this European Council regarding economic policy and economic governance,” EU Commission chief José Manuel Barroso told reporters. By his side was European Council president Herman Van Rompuy, who spoke in similarly rallying terms.
Yes, reinforced governance rules and a joint pledge to boost competitiveness mark big advances for reluctant states. But that’s the relatively easy part. Clearing up the mess from the debt debacle presents more testing challenges, among them the decision to kick any debt restructuring down the road until 2013.
Amid doubts in markets, the prospect of a return to the drawing board on that front cannot be ruled out. No surprise there. After months of endless talking, however, the summit of the overarching comprehensive package was overshadowed by Portugal’s relentless slide into the bailout zone.
Euro group chief Jean-Claude Juncker, Luxembourg’s longstanding prime minister, left no doubt about the pressure on Lisbon after the largely self-inflicted implosion of José Sócrates’ minority administration. “If ever the Portuguese government decided to ask for European aid, the instruments are now at hand to help Portugal,” he said.
“It has to be ensured that the consolidation measures proposed by the present government and that were rejected by the parliament have to be adhered to by the new Portuguese government as far as the set goals are concerned.
“If a new Portuguese government wants to do this in another way than the existing one did it, it’s up to them, but these are measures that would need the stamp of the European Central Bank, the European Commission and the euro group. It can’t be compared with an Irish or Greek adjustment programme.”
This is far more than gentle prodding from the wily euro group chief, who can be coy in the extreme when he wishes to give nothing away. Asked a couple of weeks ago about Irish demands for more bank relief, Juncker merely confirmed that he had been in a meeting with Minister for Finance Michael Noonan.
So Portugal’s plight is deadly serious, all the more so given doubt over the power of a caretaker administration to agree a rescue programme.
This matters hugely because a likely election would take at least 55 days and government formation a good deal longer, crashing into the timetable for big bond redemptions next month and in June. With bond yields spiralling, official observers in Brussels and other European capitals believe the third EU-IMF bailout will soon be under way. In defiance of the high hopes vested in the bailout overhaul, this would be an inauspicious fresh start.
This summit, the EU’s third since the start of the year, saw yet more political horse-trading. Not four days after finance ministers signed off on an intricate “term sheet” for a permanent new bailout net, German chancellor Angela Merkel sought a longer schedule for the payment of capital into the fund and a smaller contribution to begin with.
That is easily attributed to Merkel’s domestic concerns in Germany, just as Finland’s looming election was behind an unexpected three-month delay in the increase to the borrowing capacity of temporary European Financial Stability Facility (EFSF) bailout fund.
An entire suite of more radical reform measures was in play only weeks ago. One by one, however, measures which would have allowed discounted EFSF bond buybacks and European Stability Mechanish interventions in secondary bond markets were quietly shelved. Another high-stakes battle is brewing, meanwhile, over Ireland’s ailing banks. All told, it seems far too early to call in the historians.