EU Summit gives thumps up to new fiscal pact

The first EU Summit of 2012 ended on Monday with leaders of 27 European nations agreeing to sign a new fiscal treaty, except Czech Republic and Britain. Once effective, the fiscal agreement would legally bind the member nations to implement tougher austerity measures and stricter enforcement rules in their respective country. To ensure its effective functioning, the proposed deal empowers the European Court of Justice with the right to impose fine on nations who fail to follow the new rules.

Also in the recently concluded European Summit, it was decided to bring into effect the European Stability Mechanism in July instead of 2013, which was the original plan. The €500 billion permanent bail-out fund formed on May last year was aimed to insulate the rest of Europe from debt crisis, especially from Greece.

Apart from these two issues, leaders of the European nations also discussed ways to generate employment and encourage small business growth. But, one key issue that has been left largely unanswered in the European Summit is the question of Greece debt crisis. Till Europe finds a comprehensive way to deal with Greece debt crisis, it is very likely that European debt crisis would continue to haunt Europe.

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.