rising today as the markets digest the news that Europe has taken a step back from the brink of economic disaster. Eurozone leaders yesterday agreed on a second €109bn bailout for Greece, something economists said had to come in the next few days to avoid calamity. Once again, Europe's leaders have taken a small step to narrowly avert disaster. But without a big step to reform the Eurozone, is there any end to the debt crisis in sight?
Greece's private lenders will be forced to participate in the bailout and take an estimated 21% loss on their loans to the country, in what is being called a 'selective default'. But it is still unclear whether the ratings agencies will decide this qualifies as a default or not. The private lender participation was something German Chancellor Angela Merkel wanted, but French President Nicolas Sarkozy and the European Central Bank had been resisting.
The new deal is essentially an admission that the policy of the first bailout has failed over the past year. Greece cannot be saved by austerity alone, the economy must be stimulated in order to bring the Greek economy to a level where it can pay back its debts. All of the European leaders seemed to acknowledge that the agreement struck yesterday is the start of closer financial union between the member states. It is expected that talks will now begin for treaty changes that would establish closer financial union, such as the establishment of 'eurobonds'.
stern rebuke from his coalition partner Nick Clegg on Wednesday, the government seems to have changed its position. British chancellor George Osborne praised the deal yesterday and said it is inevitable that the Eurozone, which the UK is not a part of, must establish closer financial union in order to save the currency.
This reversal marks a stark change in British policy toward the euro. For years they have maintained a strategy of blocking any attempts to establish closer financial union between the countries that use the euro, even though they themselves would not be affected by such plans. It now appears that they are bowing to the reality that either they agree to a plan for greater financial centralisation in the Eurozone or the single currency could break up, which they have acknowledged would spell economic disaster for Britain.
But will the moves to create a financial union to back the monetary union come quickly enough? The new bail-out agreed yesterday will buy Europe more time, just as the previous bail-outs did. But time is running out, and if EU leaders don't quickly agree to big measures establishing closer financial union, the debt crisis could quickly spread to Italy and Spain – a possible point of no return for the Euro.
EU leaders now seem to agree on the need to establish closer financial union. But will an increasingly nationalist and eurosceptic public accept these moves? That remains to be seen.