By Marzia De Giuli, PNA / Xinhua and U.S. News Agency / Asian
Italy’s economists on Friday cheered the agreement reached at a European Union (EU) key summit to use rescue funds to ensure the financial stability of the eurozone, but warned that more needs to be done to tackle the crisis.
Following the Brussels meeting on Thursday and Friday, the EU leaders agreed to use existing funds from a permanent rescue mechanism European Stability Mechanism (ESM) that will come into force by next month to recapitalize troubled banks and purchase bonds of countries in need.
“Appropriate conditionality” would be formalized in a memorandum once an effective single supervisory mechanism is established involving the European Central Bank (ECB), read the agreement whose imperative was to “break the vicious circle between banks and sovereigns.”
Although the agreement could not be seen as a turning point, “the fact that the European situation had reached such a difficult level and has avoided a failure of the summit can be considered historic,” said Tito Boeri, a distinguished economics professor at Milan Bocconi University and former senior economist at the Organization for Economic Cooperation and Development (OECD).
“I find there were steps forward especially in the direction of the EU banking unification. From now on there will be the possibility for the permanent rescue mechanism to directly intervene in support of banks without having to go through governments,” he told Xinhua.
For example, he said, this will allow to tackle the crisis of the Spanish banking system, which local analysts had defined last week as the most urgent emergency in the single currency region, in a much more effective way, he said.
“From the point of view of what Italy was asking, there was the acknowledgment that the rescue fund will be able to intervene to avoid an excessive rising of spread levels,” Boeri noted.
On Thursday, Italy and Spain had threatened to block a 120-billion-euro (over 152 billion U.S. dollars) growth pact agreed during the first phase of the summit until they could secure short-term support to ease their mounting borrowing costs.
Therefore the agreement was also seen by Italian media as a personal success for Prime Minister Mario Monti, who at the G20 summit in Mexico last week had said EU rescue funds could be used to settle state debts of countries respecting the financial rules.
During a press conference on Friday, the Italian premier called himself satisfied of the summit result, clearing that Italy, which has seen its spread levels increase in recent months despite austerity and structural reforms, at this moment was not intentioned to use rescue funds.
However, Boeri pointed out, the permanent rescue mechanism at the center of the agreement was not equipped with its own funds (member states represent 90 percent of the capital commitments) thus its action will be limited.
“It will not be able to act as a bank, and has not all the necessary resources,” he said, warning the mechanism risks to remain “a point of principle” that will give some months of breath to financial markets but will not solve the crisis.
Marco Valli, chief eurozone economist of Italy’s largest bank Unicredit, agreed that the meeting outcome has exceeded expectations, but “there was no mention of a future potential move towards joint and several liabilities.”
The agreement was “a right but not sufficient step” also for the head of influential industrial association Confindustria, Giorgio Squinzi, who called for a more powerful ECB to prevent the euro from becoming an “artificial construction exposed to speculation.”
According to other experts, although the agreement has paved the way to a higher degree of cross-border integration and to better flexibility of crisis-fighting mechanisms, the fact that weaker countries have to formalize their request for help would still expose them to speculation attacks.
Paolo Balice, president of the Italian Financial Analysts Society (AIAF), was not surprised that European markets surged on Friday. Milan was among the biggest gainers closing up 6.59 percent, its best performance in more than two years.
Such positive reaction was an “announce effect”, he told Xinhua, as markets celebrated the EU’s becoming aware that traditional financial instruments were not enough to tackle the crisis.
But he called the EU leaders to be more “coherent” from now on. “It is important that in the next weeks there are no vacillations or statements in the opposite direction from the one taken, as already happened in the past.”
In his view, the summit had the merit to set instruments to handle the emergency. “Now we must continue in this direction, we are not allowed to step back anymore,” Balice said.