As usual, it turned out to be a case of “much ado about nothing”. Despite all the rhetoric, this week’s summit of the European Union (EU) has simply delayed decisions on a European banking union and tighter fiscal integration. These are the difficult, practical parts of a deal in terms of which Germany, the paymaster of Europe, would effectively underwrite a widespread bailout for Eurozone countries and commercial banks, in exchange for greater fiscal discipline and supervision.
However, as was expected from the start, the implementation of the deal has floundered on political divisions and national self-interest. The rest of the Eurozone is reluctant to give up more national powers to a EU that will be economically dominated by Germany, which has so far come through the debt crisis relatively unscathed. German insistence on austerity measures, with harsh social and political policies to match, are politically unpopular in the most debt-ridden Eurozone countries. German Chancellor Angela Merkel is openly sparring with French leader Francois Hollande — her most important opposite number in Europe, who wants to use economic stimulus measures to wriggle Europe out of the crisis. There are also suspicions in the rest of Eurozone that Germany is happy to keep the single currency weak in order to benefit from its exports. Conspiracy theories aside, German commercial banks and financial institutions are as vulnerable to Eurozone debt as any other country.
The apparent calm in financial markets must not fool politicians. Nobody can win until sustainable financial stability returns to Eurozone.
