Scaling the summit: Once again, EU leaders have raised high hopes of a solution

Economist
December 10, 2011

Second marriages supposedly represent the triumph of hope over experience. Similarly, in the lead-up to every EU summit, investors become optimistic that this time—finally—leaders will manufacture a solution to the debt crisis. So it was with the latest summit on December 8th and 9th, due to take place after The Economist went to press. Beforehand, Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, the French president, had thrashed out a deal which promises future restrictions on the ability of euro-zone countries to run large fiscal deficits.

The hope was that this would be enough to persuade the European Central Bank to open its wallet and buy more government bonds. The leaders also agreed to bring forward to next year the creation of the European Stability Mechanism (ESM), a fund designed to bail out ailing countries—reducing the risk that the likes of Italy and Spain would struggle to refinance maturing debts. The markets were also boosted by a promise that, unlike the Greek deal, future bail-outs would not require a write-off for private-sector creditors. Italian and Spanish bond yields fell sharply (see chart 1).

Standard & Poor’s, a rating agency, added to the pressure on the leaders to come up with a convincing deal by placing all euro-zone countries on negative “credit watch” with a view to reducing their ratings. The agency cited “continuing disagreements among European policymakers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial and fiscal convergence among euro-zone members.” It also worried about the rising risk of a recession in the euro zone in 2012.

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