Europe's Financial Outlook (Portfolio)
Video Transcript:
Video Transcript:
The leaders of the European Union will meet in Brussels on June 28-29 to analyze different strategies to mitigate Europe’s financial crisis. Because of the nature of the crisis, this will be mostly a summit about the eurozone.
First, EU leaders will address the situation in Spain and Cyprus. The Spanish government formally requested a bailout for its banking sector on Monday [June 25], but the details and the conditions of that bailout still have to be defined. The EU is likely to channel the bailout through Spain's bank restructuring fund, the FROB. Spain is going to be de facto liable for this debt. Cyprus is going to be an awkward issue for the EU leaders. The island has formally requested a bailout from the EU to rescue its banks. But the Cypriot government suggested that it has been discussing a bilateral agreement with another country -- with Russia as the main candidate.
The EU leaders will also discuss measures such as the release of project bonds, the redirection of existing EU structural funds and the expansion of the European Investment Bank capital base. These proposals are designed to provide capital for infrastructure projects in struggling EU countries, which should provide some stimulus to their economies.
These measures are likely to be approved for two reasons. First, they have been agreed [to] by Germany, France, Italy and Spain at last week's quadrilateral summit in Rome. More importantly, they do not involve significant changes in the EU framework or the use of large amounts of additional funding. But the measures are unlikely to bring relief to Spain and Italy, the two countries that are currently suffering the largest market pressure.
Finally, EU leaders will discuss a set of proposals designed by the European Commission, the European Council, the Eurogroup and the European Central Bank. The proposals include the development of a banking union, the creation of eurobonds and the implementation of mechanisms that would give the European Commission the power to require changes on national budgets.
These are all controversial proposals, because they would require significant transfers of sovereignty to Brussels. Some of them have been openly rejected by member countries. The United Kingdom, for example, announced that it would not join a banking union, while Germany and Finland consider that eurobonds cannot be issued under the current circumstances.
These decisions require time, so formal negotiations are expected to begin as early as December. The commission has explained that this is part of a ten-year project, so all the reforms would be applied in over a decade.
The European Union is facing two simultaneous challenges. On the one hand, the bloc is being pushed by the markets to achieve a faster decision-making process to respond to the crisis. On the other, Brussels is forced to seek compromises with countries that have different national strategies and protect different aspects of their sovereignty.
The EU has the tools to mitigate the effects of the crisis in the short-term. The European Central Bank is still Europe's finest weapon to reduce market pressure and help keeping yields low for short periods. However, the EU will face increasing challenges to come up with long-term solutions. The frictions between national sovereignty and European integration are being intensified by the financial crisis and are undermining Europe's attempts to mitigate it.
