Reuters
July 22, 2011
Angela Merkel will deny it, but Thursday's euro zone deal to rescue Greece again from the brink of bankruptcy puts Europe on the bumpy road to a fiscal union.
By giving their bailout fund new scope to help countries before they are shut out of credit markets, recapitalize banks and buy bonds in the secondary market, leaders of the 17-nation currency area laid the foundations of a European Monetary Fund.
They also made clear this was not the final stage in fiscal integration, with French President Nicolas Sarkozy promising new Franco-German proposals on economic governance by September.
"The EU summit was a historic victory for the French vision of EMU (Economic and Monetary Union)-- meaning that it is now on course to turn into a fiscal/transfer union," said analyst Brendan Bowen of Mitsubishi UFJ Securities International.
The German Chancellor accepted a leap forward which she had blocked in March, when a promised "comprehensive package" to solve the euro zone's sovereign debt crisis was reduced to half-measures that failed to stop contagion spreading.
In return, Merkel scored a political victory by forcing her partners and a reluctant European Central Bank to accept that the private sector should share the burden of a second Greek bailout, at a high cost to the public purse.
Banks and insurers will have to write down about 21 percent of the value of their holdings of Greek bonds. Many economists doubt whether the resulting reduction in Greece's debt pile will be sufficient to avoid a hard restructuring at a later date.
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