George Papandreou, prime minister of crisis-ridden Greece, warned that the euro zone would face its most critical week this week because the instability would last for a long time if the Europe Union Summit could not work out a specific solution. The much-anticipated summit will concern not only the market confidence in the European Union’s responses to the European debt crisis but also whether the global economic recession can be eased. Generally, the summit is expected to have five highlights:
1) How to rescue the “Greek patient?”
The continued deterioration of the Greek debt crisis has become the greatest woe facing the European Union. It is pretty certain that the summit will pave the way for extending Greece the sixth batch of loans. After several weeks of inspections, the personnel from the European Central Bank, the European Commission and the International Monetary Fund have suggested offering Greece 8 billion euros of bailout loans. If everything goes well, leaders at the summit will make a decision based on the suggestion.
The situation is still rather complicated. What will be the next move when the first round of bailout loans concludes in 2012?
The European Union Summit this summer already decided to provide Greece with the second round of bailout, with a greater scale than the first one, totaling 109 billion euros. However, E.U. member states have a long way to go to reach a consensus on the decision.
Particularly, after countries, including Finland, asked Greece to offer bailout loan guarantees, the discussions made by the members of the euro zone over the second round of collateral-based bailout loans have not reached a conclusion. Finance ministers of the E.U. members have still been somewhat reluctant to initiate the second round of bailouts under the cover of “changes in market conditions.”
2) How to save “bank crisis?”
The European debt crisis has caused the inter-bank offered rate between European banks to soar sharply where the banks no longer trust each other, increasing the risk of an outbreak of crisis in the banking sector. The counter-proposal made by E.U. Commission President Jose Manuel Barroso a few days ago suggested that capital conditions in the banking industry should be improved by immediate capital reorganization in European banking sector.
3) How to make the EFSF work?
After the Slovakian parliament approved the expansion proposal for the European Financial Stability Facility (EFSF), the 17 member countries in the euro zone finally reached an agreement. The positive significance of such agreement is not to be belittled, but a lot unsettled problems are not to be overlooked either. The next summit needs to resolve the differences still existing between Germany and France on what conditions prompt the use of the EFSF to save E.U. banking, purchase the sovereign debts of countries in the euro zone or provide precautionary credit. Another problem awaiting solution is that whether the EFSF, which has a 440-billion-euros credit scale, should be leveraged to provide security for the trust fund while expanding the scale of capital funds in circulation.
4) Will the ESM come into play ahead of schedule?
The European Stability Mechanism (ESM) was scheduled to be launched in 2013 as a permanent rescue funding program to succeed the temporary EFSF, but due to the deepening European debt crisis, European Commission President Jose Manuel Barroso recently called for the ESM to come into force in the first half of 2012, which has gained the approval of major euro zone countries. Market sentiment will be greatly improved if Barroso’s proposal is passed at the European Union summit.
5) Possible establishment of a euro zone government
The systemic flaws of the euro zone exposed during the European debt crisis can no longer be overlooked. Germany and France, whose frequent talks right before the first European Union summit in July this year contributed much to the success of the summit, will remain crucial to another summit. Germany and France are showing greater interest in exchanging views, and investors hope that the two countries can again bring good news for the market. However, the German government has warned that the E.U. summit may not solve all problems plaguing Europe.