EU countries divided on Euro before EU Summit

Before Friday’s crucial EU summit, EU countries were reported to be divided on several issues over the debt crisis. Difference of opinion emerged about the ways austerity measures would be ensured among member countries and execution of reform activities (within specific time frames) through a centralized monitoring.

Wednesday also saw Germany advocating for full and permanent change in the European treaty, creation of two separate bailout plans – one for short term and another for long term and extension of debt limits for the protection of Spain and Italy. Some other nations like France, however, want an immediate change in the treaty to deal with the euro crisis.

Since changing the entire European treaty may take up to two years, officials of European Union are exploring other ways to deal with it. Herman Van Rompuy, the euro zone and also the European Council president, proposed a quick fix way to ensure‘fiscal discipline’ and avoid delays of a full change in the European treaty. This requires changing a single protocol wherein leaders of respective nations would, under the directives of European Central Bank as well as European Parliament, enter into an obligation to stay within budget for that time frame. Herman Rompoy further elaborated that those nations who violate this rule could be punished with further economic sanctions and more tax burden or with both.

Experts are of the opinion that punishing offender countries that go over-budget would require full and fundamental changes in the treaty rather than changing just one of the protocols. European institutions must have absolute power to squash national budgets.

A new accord to address Eurozone debt crisis

After some hard bargaining, European leaders have finally succeeded in striking an agreement that could tackle the much-awaited Euro crisis or Eurozone financial crisis. Under the agreement reached on Thursday early morning, European banks would absorb 50 percent losses on Greek debt and would also step up the rescue package from 440 billion Euros to 1.4 trillion Euros. This is expected to address three important issues on hand – Greece debt crisis, unstable banking sector and, finally, global economy.

The agreement calls for Greek private bondholders to voluntarily write off the bond value by 50 percent, which roughly amounts to 100 billion Euros. This is believed to bring down their spiralling debt burden from 150 percent to 120 percent of its economic output (GDP) by 2020.

As a first step, banks are required to raise new ‘safe’ capital – at least 150 billion Euros by June end. This is needed to shield themselves from the losses incurred on loans to capital-starve countries including Greece. That, in turn, should increase their risk-free asset holdings to 9 percent of the total capital.

Though definitely a positive step, it remains to be seen how this enormous amount would be funded. Question is, can they arrange for such a massive bail-out fund? Only time will tell.