For a long time, governments of the European Union argued on what financial sacrifices should be made for the sake of a common cause. And finally, they decided on a plan for the EU to overcome the debt crisis. But will the EU save this plan?
On October 26, at the EU summit, an agreement was reached on the recapitalization of European banks. Private investors managed to persuade to write off half of Greece’s debt burden (the debt reaches 350 billion euros, of which 210 billion belong to private investors). The European Financial Stability Fund is planning to increase to 1 trillion euros, and it will probably be filled by developing countries (BRIC) and the International Monetary Fund.
It should be noted that Greece is on the verge of default, since it cannot fulfill its loan obligations. The second most difficult financial country in the EU is Italy, with a government debt of 1.9 trillion. Euro, 120% of the state’s GDP. Italian Prime Minister Silvio Berlusconi said that a plan to reduce Italy’s public debt will be ready by November 15. The champion debtor group also includes Spain, Portugal and Ireland.
These decisions came as a surprise to many, as the negotiations went on for a long time. Berlin was very cautious about the idea of providing additional assistance to countries in crisis. So, German Chancellor Angela Merkel was against the proposal of the French President Nicolas Sarkozy to start printing common debt bonds for Her. The fate of this idea has not yet been determined.
Polish Prime Minister Donald Tusk made a statement that by June 30, 2012, the capital adequacy (this is the ability of a financial and credit institution to repay its obligations, despite financial losses) of European banks is planned to increase to 9%. So the EU leadership plans to make the banking system more resilient to possible financial risks.
According to the European Banking Organization, in order to increase capital adequacy, European banks need to allocate 106.4 billion euros. The EBA said that additional financial injections are required by 70 EU financial institutions. At the summit, representatives of the European Union decided that financial resources for these purposes will be found, although no specific sources were named.
Experts believe that the greatest need for recapitalization is the Greek, Italian and Spanish banks, which are holders of the sovereign debts of their states. To a lesser extent, support is needed by Portuguese, French and German banks. The capital of banks in the UK and Ireland was deemed sufficient.
During the negotiations, Angela Merkel, Nicolas Sarkozy, IMF Executive Director Christine Lagarde and Charles Dallara, head of the Institute of International Finance (an influential structure of banking lobbying), EU heads demanded to write off 60% of the debt from Greece. Dallar, who was authorized to protect the interests of private banks, said that such a radical solution to the Greek question could lead to the transfer of this model to other states.
As a result, they agreed on a figure of 50%. Debt writing off should change the ratio of Greek debt to the country’s GDP. By 2020, it should decrease from the current 170% to 120%. In addition, the EU countries will provide Greece with additional financial assistance in the amount of 130 billion euros. The money will be allocated by the International Monetary Fund and the European Financial Stability Fund.
Athens must once again reduce government spending in order to reduce the budget deficit. Greece has already made a promise to do so. It is clear that ordinary citizens will not be pleased with such news. Greece has been shaken for several months by protests, some of which led to pogroms and clashes with the police.
The increase in the “fund for saving Europe.” The European Financial Stability Fund will be the main instrument for saving not only Greece, but also Italy, Spain, Portugal, and Ireland. For this, the EFSF will be increased to 1 trillion. Euro. It currently has 440 billion euros.
The European leadership noted the fact that even this amount will not save the EU from the debt crisis. Under the current conditions, only a fund will be able to stabilize the EU financial market, the size of which will be increased to 2 trillion. Euro.
Who will save Europe?
Interestingly, Paris and Berlin themselves are not going to fill this fund, at least in full. EU leaders have concluded that such a move could entail a downgrade of Germany and France. Therefore, they decided to involve the developing countries of the BRICS and the IMF in this matter. So in China, gold and currency reserves exceed the figure of 3 trillion. dollars.
Beijing has already reacted positively. Chinese Prime Minister Wen Jiabao said the country’s readiness to help the European Union, as the “financial tornado” in this region could inflict a severe blow to China’s largest export market. French President Nicolas Sarkozy said that in the near future he intends to begin negotiations with Hu Jintao about China’s participation in the EFSF. On October 28, EFFS head Klaus Regling is due to arrive in Beijing.
The EU believes that Beijing could buy government bonds of countries such as Greece, Italy and Spain in a larger volume, which could give Europe a stabilizing effect and prevent a potential default of these countries. Some experts suggest that China may increase the share of European debt securities in its foreign exchange reserves. Although it is doubtful that this will save the EU, this measure will help to temporarily calm the markets, postpone the denouement. But for a cardinal change in the situation, it is necessary to change the strategy, this is only a tactical step.
Beijing, apparently, will support the European Union, this step is beneficial to him. Firstly, he will receive another leverage of political influence on the countries of Western Europe, it will be easier to put pressure on them in order to obtain the latest technologies, including military. Secondly, in saving the EU, the Chinese are saving their economies, delaying the onset of a storm that is beneficial to the United States. Thus, James Gelbraith, professor of economics at the University of Texas, believes that the debt crisis of the EU countries will lead to an explosion of violence that will begin in peripheral countries and at some point “the destruction of society will become intolerable, and then there will be an explosion.”
Japan. The head of the Ministry of Finance of Japan, Jun Azumi, made a statement that his country was ready to provide financial assistance to the European Union to resolve its debt problems at any “opportune moment”. The Japanese minister noted that stability in the European Union is in the interests of Tokyo. It should be noted that at present, Japan has already bought about 20% of EU debt bonds.
Other countries that could help save the EU include Norway, Russia, South Korea, Australia, and the Persian Gulf oil monarchies.
White House spokeswoman Jay Carney said the United States is not ready to help countries in the European Union that are in financial distress. According to him, Washington will not directly provide financial assistance to Europeans. The White House believes that the EU countries have sufficient financial potential to solve this problem. The leadership of European countries must show political will to solve their debt problems.