Is there anything at the end of the tunnel for EU?

The difficult situation in the EU is complicated by the fact that the leaders of its countries have no unified plan on how to get out of the crisis. They seem to be trying to arrive to an agreement, but the results of their negotiations are not yet impressive. The last EU summit did not bring any tangible results. There were no specific decisions on the European Banking Association, or the fate of Greece and Spain.

There were no major breakthroughs during the anti-crisis EU summit in Brussels. The leaders of the EU member countries promised to solve all the problems yet again, but were not able to achieve results. The European "left," led by French President Francois Hollande, continued to actively resist the attempts of Berlin to impose general principles of fiscal discipline in the Eurozone.

Another attempt by Angela Merkel to force Europe to live by the rules of Germany has failed. The European "right" failed to make the budgets of all countries to fall under the control of the European Commission. However, it would be wrong to say that Merkel has lost this round of political struggle as the attempts to force Germany to pay the bills of other European countries have failed as well.

Officially, the main topic of the Brussels meeting was pan-European bank regulation, but the parties have made no decision even on this seemingly simple issue. The situation after the summit reminds of a variety show. It is tough to figure out whether Hollande and Merkel were present at the same summit or different ones. Hollande commented on the summit by saying that the topic of the summit was the banking union, and not the budget one, and the only decision taken at the summit was the creation of the bank union by the end of the year. Merkel talked about other results of the summit. She said that the European Central Bank would be engaged in the practical management of the banking sector in 2013. What conclusion can be made from these contradictory statements? There is no consensus among the leaders of the European Union not only on anti-crisis steps, but also on what they should be telling the journalists.

De facto there is only one obvious result of the summit: the next summit will be hosted in December, and the participants will try to resolve all outstanding issues once again.

The European Union is bursting at the seams, and politicians cannot agree on the basic principles of saving the European economy. The last summit calls into question the fact that the united Europe can remain united in the face of the economic crisis.

A decision on setting up some system of banking supervision was made at the summit. According to Jose Manuel Barroso, head of the European Commission, a system of banking supervision will be developed by January of 2013, and in 2014 all 6,000 Eurozone banks will be under the supervision of the ECB. Then the anti-crisis fund ESM will be entitled to give direct loans to the banks, bypassing the decisions of the national governments that now act as mediators. It could have happened earlier, but according to Angela Merkel, quality is more important when creating a system of banking supervision than speed. At the same time, investors obviously expected more as there were rumors in the markets about a possibility of creation of a banking union in the Euro Zone and a united Ministry of Finance.

Many leading experts believe that the European system of banking supervision will not be effective and efficient, because it is created on a shaky legal foundation against the will of European citizens. The new mega-supervisor of Europe will become a hostage of its own semi-legal status, banks, European politicians and debtor countries.

The main purpose of the Banking Association is to sever the vicious link between the banking problems and sovereign debt. Today, getting help from the EU for their own banking system, the receiving countries only increase their national debt. For countries like Portugal or Spain, it is not a medicine, but pure poison.

The problems of banks in Ireland led to the need to increase their capital. The government had no money for it, so it sought assistance from the EU. Ireland now has to comply with a program of reform and austerity. Spain was promised money directly from the bailout fund ESM to avoid increasing the national debt. However, this is not possible until a single banking regulator is created. Spanish Prime Minister, Mariano Rajoy, said that direct capitalization of banks can be implemented only in the presence of the bank supervisory system approved by the Eurogroup. He added that he did not know when it would happen.

The proposal to create a single bank union caused a lot of controversy. Germany would like to see this controller to control only the banks most important for the EU financial system. Britain and Sweden also opposed it, but for other reasons. They do not want to give the ECB control over their banks because they are completely independent from it.

In addition, the Commission has chosen a failed method of creating this bank regulator because it does not have the authority to alter the function of the ECB. The consequences could be dire. This control does not solve many important problems in the banking sector. It does not create a single system against crises. Without this system it is not clear how the ECB is going to interact with the local authorities. It will not help to create a single system of guarantees on deposits required to stop the outflow from peripheral countries to the center. The ECB also has possible conflicts of interest, and it will be difficult for the bank to conduct an independent monetary policy. There is a risk that the actions of the ECB will affect individual banks. As a result, the parliament, government and courts will have leverage to control the regulator.

Europe seems to be looking for ways to transfer to a strong federal model and overcome the weaknesses revealed by the Euro crisis. However, it chooses various detours to avoid asking the opinions of its citizens. It looks like the systemic problems will be difficult to overcome. It is difficult to predict a bright future of the structure created on the weak legal basis. This is why the banking sector had a very strong reaction to the outcome of the EU summit. The stocks of all the major European banks went down.

The summit results disappointed those who expected concrete solutions in terms of Spain and Greece. The situation in these countries is quite complicated. Balearic Islands and Asturias were the seventh and eighth Spanish autonomous regions that have requested financial assistance from the government. Everyone was convinced that the summit will decide on the allocation of money to Greece, but the decision was postponed. This likely has to do with the U.S. elections, or the EU is waiting for the Greeks to run out of money so they are more agreeable.

Many analysts still believe that Greece will abandon the Euro, but it will happen in 2014. They point to the fact that it is impossible to prevent. The new tranches of aid may only postpone, but not eliminate this difficult decision. Greece's debts are increasing, the political situation is not stable, and the price of saving a space in the monetary union is getting increasingly higher.

This summer CitiGroup produced the most pessimistic outlook for the European economy. With a probability of 90 percent, Greece would leave the Eurozone in early 2013. Bank experts have revised their forecast, reducing the possibility of Greece leaving the Eurozone in the next year to 60 percent. But they are confident that Greece will not be able to stay in the monetary union forever. Greece has to save, the budget remains deficient, and negotiations with creditors are difficult. If the country loses the support of IMF and ESM, it will lose the access to the ECB liquidity. As a result, Greece will not have the money or the opportunity to get it. It will have to abandon the Euro and start printing local currency to cover its expenses.

Russian Prime Minister Dmitry Medvedev is convinced that the EU will be able to overcome the crisis in the Eurozone. He commented on the results of the summit as follows: Europe could be saved by the political will of the EU and other countries. Yet, it is nowhere in sight.

Sergei Vasilenkov

Pravda.Ru

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Author`s name Dmitry Sudakov
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