Does this Euro deal promise anything?

Mon, 12 Dec Pre-Open

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Let us start the discussion with the most important aspect of the new endeavour to save the Eurozone. In the new deal, we do not have all 27 members of the European Union. All 17 members that use the Euro and six other members Denmark, Latvia, Lithuania, Poland, Romania and Bulgaria would collectively pursue a fiscal and economic union via a new treaty outside the EU. These 23 members are termed as 'euro plus". One of the most important members, the United Kingdom (UK) is not participating in this treaty. The British Prime Minister, Mr David Cameron, vetoed a change in the existing EU treaties and left other big leaders in the EU frustrated as they tried hard to convince Mr Cameron to support the new treaty.

Despite Britain's stubborn attitude in the battle against the crippling debt crisis, euro plus went ahead and made a new treaty. This treaty has some good signals for the global economy. For starters, these countries have accepted that excessive debt is the root cause of the problem. And, they have decided to pursue a tougher budget discipline regime with automatic sanctions for deficit sinners in the single currency area. All 23 countries are committing to keep their deficits below 0.5% of GDP. This is a definitely a welcome move towards an attempt to overcome the growing debt crisis. According to this new treaty, all countries would be declaring in advance how much debt they plan to take on through bond sales.

They have also decided to give Euro 200 bn to the International Monetary Fund (IMF) to ensure that the IMF has adequate resources to deal with the crisis. Further, the European Stability Mechanism (ESM), the bailout fund, would take over from the existing rescue fund, the European Financial Stability Facility (EFSF).

All sounds good. However, are these steps enough to save the European Union?

ESM seems set to be capped at Euro 500 bn. This is definitely huge. But, Italy's total debt alone is roughly around Euro 2 trillion. Here, we are not even counting Spain, Portugal or Ireland. And what about the problems of Greece! That would also require further bailouts. Hence, in terms of monetary support for future bailouts, the new attempt does not look promising. In addition, there is still no agreement on the more intrusive powers for the European Commission over the fiscal policies of the debt ridden states. What is more, absence of the UK in the new treaty is a big blow as Mr Cameron has warned the new euro plus bloc that it would not be able to use the resources of the EU.

Hence, while this deal may calm the storm for some time, it totally lacks the potential to solve the growing crisis in the EU. The attempt to get the United Kingdom on board is still on. Even if all 27 members have agreed to this new treaty, there is a long way to go. A strong political will, genuine concerted effort, more monetary support and stricter fiscal reforms would be required to tame the existing debt monster in the Eurozone.