Regardless of the actual weight of its resolutions, which were to be hammered out amidst simmering controversy, the June EU Summit was going to be hailed as a breakthrough. Europe's economic situation – above all, the frightening developments in the Euro zone – made the outlook for the EU so bleak that any kind of clarity had to be welcomed by the global political class and business community. As of today, five EU countries have lined up for bailouts, and indications build up that Italy, Europe's fourth-largest economy, is sliding towards the same. In the settings, illusions that the EU owes its problems to the Greek imprudence or that marginal economic growth occasionally discovered here and there holds a promise of a wider recovery are growing unsustainable.
The forum must be credited with solving the only problem that proved solvable – the stress-ridden EU got a much-needed break. As for the expectations that Brussels would manage to put together some sort of novel anti-crisis machinery over the next six months or so, or would finally put the existing mechanisms to work with measurable success, guarantees that this will happen are still missing.
The recent EU summit, the 18th one since the start of the economic meltdown, highlighted the lingering discord in the ranks of the alliance. The division line obviously coincides with the German border as chancellor A. Merkel continues to resist the mounting pressure from Brussels and refuses to give the green light to the Eurobonds plan. Debt-burdened Italy, Spain, and France hope that Eurobonds, if floated, would help them reduce the borrowing costs but Germany, Europe's healthiest economy and already the main donor to Europe's stabilization funds, feels that its resources might come under yet greater strain. Merkel expressed her rejection of the debt-pooling idea in strong terms, citing, in particular, the lack of control over how the money shifted from country to country within the EU is being used. It should be born in mind as well that last year Germany's own indebtedness grew by 2.1% and broke the Euro 2 trillion mark.
The debt problem casts a long shadow over the electoral aspirations of Germany's ruling coalition as the 2013 poll in the country is drawing closer, which, in part is the explanation behind Merkel's being unenthusiastic about lifting Greece and other European peers out of trouble regardless of costs. Merkel maintains that launching Eurobonds ahead of the fiscal and tax integration would be a replay of Europe's former mistake, says Eurobonds and the German constitution are hard to reconcile, and condemns the Eurobonds plan as counterproductive. Her point is that the first steps should be to look into various collective responsibility options and to tighten the overall budgetary discipline in the EU. The position is the opposite to what French president François Hollande and the Brussels top brass press for, but those cannot simply brush off the objections raised by Berlin.
Germany, on the other hand, had to buy the right to the above amount of independence by bowing to Brussels on the parameters of the EU growth and employment pact, which is supposed to boost Europe's economic output and to massively create new jobs. The figure in question is Euro 120-130b in two Euro 60-65b installments. The program came under fire from Italy and Spain, both charging that its timetable could be further compressed and discontent that diverting the corresponding funds towards current budgetary needs or bank recapitalization would be disallowed. Brussels promptly offered perks to Madrid and Rome in the form of additional financial support for bank recapitalization, something Merkel certainly did not favor but had to agree to avoid chronically dropping out of the European concert.
The mission of recapitalizing shaky banks will be passed to the European central bank which, by the end of the year, will emerge as the main EU banking regulator. European Commission President Jose Manuel Barroso lauded the shift as a new round of Eurointegration and, indeed, an attempt is being made to centralize the financial decision-making across the EU by equipping it with an institution akin to the US Federal Reserve, but national legislatures are yet to confirm the reform. As a result, Spain will get the promised Euro 100b recapitalization infusion on formerly commonplace terms, with fewer strings attached.
The EU summit also discussed the milestone program intended to create, over a decade, Europe's full-scale economic and monetary union. The corresponding document was authored by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, head of EU finance ministers group Jean-Claude Juncker, and European central bank chief Mario Draghi. The program is carved up into phases, the first one implying that the EU countries should enable a common EU treasury to oversee fiscal discipline nationally and on the EU level. EU countries subscribed to the treasury plan on the closing day of the summit but, importantly, it remained undecided whether the regulator is going to be authorized to veto national budgets of the countries exceeding preset borrowing limits.
The decision to institute the treasury trailed the release of the annual report by the Bank of International Settlements which warned that the potentials of national central banks to stabilize the respective economies are depleted. The banks are overloaded with toxic assets which estimatedly doubled over the past decade. BIS experts attribute the problem to the national governments' inability to formulate serious anti-crisis agendas, forcing the European central bank to dish out tons of money to prevent collapse, as in the recent case of Spain. According to the BIS assessment, the situation is becoming a vicious circle, with risks the higher the longer it persists.
G. Soros, a financial top player and a renown architect of the new world order, openly stated that the Euro will crash if the EU leaders fail to achieve greater synchronism. France's Le Monde holds the same, stressing that the EU countries had a tendency to negotiate over the Euro crisis in the same mode as over issues like prices for agricultural products, allowing short-term national interests to dwarf the union-wide anti-crisis agenda.
Judging by the interests on ten-year sovereign bonds, the economic downturn already spilled over the EU borders. The indicator oscillates in the risky 5%-10% bracket for Hungary and Poland, and is climbing to similar levels for the Czech Republic. In the Euro zone, Belgium is currently closest to being put on the same list. Bloomberg's readings of the key economic barometers are similarly alarming: hypothetically, at least 6 of the 17 Euro zone countries are already going through recession.
The economic tendencies can easily translate into lasting and perilous political trends. Germany's Die Welt writes that the specter of a financial crisis comparable to that of the 1930ies – that is, to the one that propelled the Nazi to power in Germany – is knocking on Europe's doors. Harold James, Professor of History at Princeton University and the European Institute in Florence, and Professor of International Affairs at Princeton’s Woodrow Wilson School of Public and International Affairs, discerns frightening parallels between the vicious cycle of spreading indebtedness as of the 1930ies and today's picture. In Germany, by the way, the population is split on Euro almost evenly, with 43% eager to keep the currency and 41% saying they would rather revert to Deutsch Marks. Moreover, a survey of attitudes towards EU membership conducted in Germany gave those who favored it a fairly unconvincing majority of 51%.
Due to the inability of the EU governments to put together a strong anti-crisis program, the epicenter of the crisis should, in the foreseeable future, be expected to drift towards East Europe. Right now the quantities of foreign-owned assets in the region – 75-80% in Bulgaria, Hungary, Poland, Romania, and the Czech Republic or 90% in Croatia which will blend into the EU in the middle of 2013 – seems risky considering the banking sector's ills in East and South Europe. Based on a broad array of data, a second wave of the economic downturn that would mostly rage in East and Central Europe currently looks like an inescapable projection. Countries of the region are still in the process of switching to the EU standards, but their economies are already tightly interwoven with the embattled financial sector of the EU. It should be taken into account that the adaptation of novices to the EU conditions was supposed to take ages, and the admission of Hungary, Poland, and the Czech Republic to the alliance used to be seen as an intermediate phase of a grand transition rather than the end result. That should make it clear why East European countries are at the moment extremely vulnerable to the second wave of the crisis which already looms on the horizon.