Another euro zone summit

October 17, 2012

The day before an EU summit that probably won’t come up with anything decisive in crisis management. If that sounds rather underwhelming beware. There’s an awful lot of jockeying for position over when Spain will seek sovereign help, the Greek troika talks continue to look messy with time running very short and the leaders would be very well advised to demonstrate that their longer-term plans for closer integration are not running out of puff – item one on that agenda is getting plans for step one of a banking union back on track.

We could get a decent crack at this today with a number of EU leaders, including Angela Merkel, Spain’s Mariano Rajoy and Greek premier Antonis Samaras, gathering in Bucharest for a centre-right political congress.

On the jockeying front, German Finance Minister Wolfgang Schaeuble has called for a leap forward in euro integration, particularly in terms of fiscal union with a commissioner given power over members’ budgets. That’s going to prompt some heated debate in Brussels on Thursday/Friday with France, in particular, likely to be aghast.

Italy’s debt agency chief urged Spain to take a bailout while Madrid, in turn, would quite like Rome to seek aid at the same time, in some sort of united front. The IMF’s chief economist is also calling for a plan to cover Italy and Spain.

The previous German preference for Spain to hold off for now (Berlin is wary of how the Bundestag might react) appears to have faded out of the picture. When it comes, Spain is expected to take a precautionary credit line from the ESM rescue fund to allow the ECB to leap into action.
Meanwhile, interminable talks about how to put Greece’s bailout programme back on track hit another temporary snag last night, this time over labour reforms  to scrap automatic wage increases and reduce severance payments, which some of the governing coalition say they can’t wear.

All that raises the possibility of a separate euro zone leaders’ meeting being held over the next two days, as a sub-set of the EU summit. In the end, the euro zone finance ministers’ meeting on Nov. 12 looks like the more likely forum for decisions. Nonetheless, we should be prepared to move into wrap mode today, with the summit looming, and will need an overnighter too.

Spain dodged one bullet last night when the long-awaited Moody’s review kept it with an investment grade rating, rather than cutting it to junk. But it made clear that its decision was predicated on Madrid seeking help so that the ECB could buy its bonds. That has caused Spanish bond yields to tumble to their lowest since early April.

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