The European Union and the euro area have done much over the past 18 months to improve economic governance and adopt new measures in response to the sovereign debt crisis. However, market tensions in the euro area have increased, and it had become important for the member states to come out with a combined plan to find solutions for the crisis. The need to step up efforts to address the current challenges had become imminent.
The member states have agreed on a few steps which have to be taken to curb the ongoing crisis, these are mentioned below as per the “EU SUMMIT Report” held on Dec 9, 2011 in Brussels.
- A plan to contain the debt turmoil, leaders added 200 billion Euros ($267 billion) to their warchest and tightened rules to curb future debts.
- The start of a 500 billion-euro rescue fund to next year and diluted a demand that bondholders shoulder losses in rescues.
- Leaders aim to set up the permanent rescue fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule. Germany deflected a move to grant the ESM a banking license, which would enable it to multiply its firepower by borrowing from the ECB. This will require a new deal between euro area Member States to be enshrined in common, ambitious rules that translate their strong political commitment into a new legal framework.
- General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.
- The rules governing the Excessive Deficit Procedure (Article 126 of the TFEU) will be reinforced for euro area Member States. As soon as a Member State is recognized to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed.
- The European Financial Stability Facility (EFSF) leveraging will be rapidly deployed, through the two concrete options agreed upon by the Euro group on 29 November.
- The EFSF will remain active in financing programmes that have started until mid-2013 as provided for in the Framework Agreement; it will continue to ensure the financing of the ongoing programmes as needed.
- Reassess the adequacy of the overall ceiling of the EFSF/ESM of EUR 500 billion (USD 670 billion) in March 2012;
- Euro area and other Member States will consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. We are looking forward to parallel contributions from the international community.
The European leaders have come out with a so called “Blue print” for a solution to the ever so long two year old debt crisis. At their summit, euro-zone leaders agreed on the basics of a new “fiscal compact” which should help to reduce the risks that another debt crisis. However a big gap was left between the theory and practical side of the fiscal measures which have been planned out. As there were not many clarifications as to how long and by when would they look to curb the debt crisis. The major part which was in high expectation from investor as well as market analyst was left untouched and damped, namely the much bigger bond purchases by the European Central Bank. So overall the summit might have brought out positives for the market to react to but as we move forward it would take time to get rid of this optimism and the focus falling back to the prevailing debt crisis.
(source: Karvy Stock Broking)
