What to expect at next week's EU leaders' summit

Mats Persson

Mats Persson is Director of Open Europe, an independent think-tank with offices in London and Brussels campaigning for EU reform.

In recent weeks, EU negotiators have churned out euro treaty drafts like hot cakes.
The new euro deal – the so-called fiscal compact – was meant to inject a proper dose of fiscal discipline into the eurozone, but faithful to their habit, EU leaders raised expectations at a summit in December, only to backtrack on some key points days later.
Several ambitious plans expected to be in the there, such as constitutionally-enshrined spending caps in all euro states (= referendum in Ireland) and a commitment to annual debt reductions, have already been watered down.
On their fourth draft and counting, EU leaders have vowed to agree to a final text at a meeting in Brussels on Monday – at which David Cameron will also be present – with adoption at yet another meeting in March. There are a number of factors to look out for at the summit, but the most important have nothing to do with the fiscal compact:
The euro’s permanent bailout fund (ESM): The original plan to trigger the activation of the ESM by a qualified majority vote, with an 85% threshold, meaning that Germany, France and Italy but no one else would have a veto, has been dropped. The Finns wouldn’t have it. A potential top-up of the ESM is also on the cards, with IMF Director Christine Lagarde calling  for more cash to go into the fund. The issue is unlikely to be resolved on Monday.
Who’s in and who’s out? Britain will not sign up to the fiscal compact, that much we know. Of the other non-euro states, the Czech Republic remains reluctant and may hold a referendum on the deal (almost 57% of Czechs are against joining). The other non-euro states both want to have their cake and eat it – invitations to euro meetings, but without being bound by the actual rules in the fiscal compact.
In the latest draft, non-euro states would be invited  to “at least” one eurozone meeting a year (what an honour), but only if they sign the agreement and abide by at least part of the rules. The Danes, the Swedes and the Poles aren’t happy with that trade-off,  with Warsaw complaining about the French being difficult.
The role of the EU institutions: The extent to which the EU institutions can be used to enforce the rules in the pact remains a hot potato – not least since Cameron has insisted that their use would be limited. As the draft stands, the ECJ would be able to impose fines on countries that fail to implement the spending caps into national law, but not if they actually broke them (yes, euro fudge). Fines would be paid into the ESM’s bailout pot, meaning that the Danes are out if it applied to them.
All of this is politically very interesting, but it is hard to see anything in there that will actually “solve” the euro crisis on economic grounds. As we know by now, this is mostly about giving the "Iron Chancellor" some political cover to potentially put more German cash on the line.
The Greek debt deal/second bailout: But the far more interesting issue is the  parallel discussion over the fate of Greece’s massive debt mountain. The Greek government and banks, along with other private creditors, are stuck in talks over a voluntary Greek restructuring -  the prerequisite for a second bailout package that Greece needs in order to avoid disorderly default in March (no pressure then). A deal looks anything but certain. Eurozone finance ministers have rebuffed an offer from private creditors, claiming that, for their liking, bondholders were seeking to charge too high an interest rate on the Greek bonds they would be swapping for ones with longer maturity (part of the plan involves bondholders agreeing to swap their old bonds for new ones with a 30 year maturity and at least a 50% nominal write down as well as a lower interest rate). Though the difference between ministers’ and bondholders' preferred rate is tiny (0.5%) – that could be enough for the EU/IMF/ECB to render Greece’s debt unsustainable, meaning no more EU aid, as debt sustainability is a prerequisite.
Sadly though, that is not even the biggest problem. Even if a deal on the interest rates can be thrashed out, some Greek bondholders are still refusing to take part – possibly leaving too few creditors willing to take losses to achieve an adequate debt reduction.
So, four vital discussions going on ahead of Monday: the fiscal compact bundled together with the ESM, and the scale of the Greek write down linked to its second bailout package.
If EU leaders walk away from Monday’s meeting with half the issues solved, that would – by eurozone standards – mark a major achievement.

http://blogs.telegraph.co.uk/finance/matspersson/100014359/what-to-expect-at-next-weeks-eu-leaders-summit/