European leaders declared a turning point in the Greece-fueled debt crisis, shifting their focus away from the budget-cutting spree that has dominated two years of rescue operations.
With a second Greek aid package wrapped up and the euro region slipping into recession, the leaders committed to a pro-growth agenda that sits uneasily with a deficit-control treaty that was signed today at the 17th summit since the outbreak of the crisis.
“We’re not out of the economic crisis yet but we are turning the page of the financial crisis,” French President Nicolas Sarkozy told reporters after the Brussels summit.
European leaders are on guard against a repeat of the false dawn of mid-2010 after Greece’s first bailout and the setup of a rescue fund. A phase of market calm was jolted by German demands for bond writeoffs that rattled investors, forcing Ireland and Portugal to fall back on emergency aid.
The next tests include Spain’s defiance of deficit-reduction targets, a wrangle over the size of the rescue fund and pleas for more International Monetary Fund backup, all flanked by the multi-year effort of stepping up Greece’s aid and then making sure it gets paid back.
Greece’s 130 billion-euro ($172 billion) second package, confirmed on the eve of the summit, brought to at least 386 billion euros the sums committed or disbursed by European governments and the IMF to keep the euro -- a currency designed to last forever -- intact.
Added to that are 219.5 billion euros spent by the European Central Bank to buy the bonds of struggling countries, and another 1 trillion euros in unprecedented ECB loans to tide the banking system through the crisis.
“It’s a reassuring picture which is still very fragile because we have a lot of uncertainty and the countries of Europe have to persevere,” ECB President Mario Draghi said at the summit. “It’s a much much better picture than we had until November.”
The Euro Stoxx 50 Index has advanced to a seven-month high and yields on Spanish and Italian government bonds have plunged as investor concerns that the single currency was at risk eased.
“For the short term the risk of contagion has been eliminated, but the deeper problems are still there,” Zsolt Darvas, an economist at the Bruegel research institute in Brussels, told Bloomberg Television today.
The next hurdle is to line up private investors to take losses of more than 70 percent on Greek bonds in a bond exchange, the key plank in a strategy to reduce Greece’s debt to about 120 percent of gross domestic product by 2020, a figure still double the euro-area limit.
Finance ministers will hold a March 9 teleconference to review the outcome of the swap offer. The incentive for bondholders is that a refusal to take part might lead to even bigger losses.
Whether there is a fallback position was left open. Luxembourg Prime Minister Jean-Claude Juncker said there is a back-up plan for Greece, Finnish Prime Minister Jyrki Katainen said there isn’t, and Sarkozy called talk of yet more aid an “odd declaration.”
Prime Minister Helle Thorning-Schmidt of Denmark, one of 10 EU countries outside the euro, concluded: “Everyone knows that we are not completely finished in terms of the Greek situation, but everyone understands that we take substantial steps in a positive direction. For the first time in many, many months this is not a crisis summit.”
Leaders labeled Greece a “unique” case, promising that bond writedowns are a thing of the past, in a reversal of the strategy demanded in late 2010 by Chancellor Angela Merkel of Germany, Europe’s dominant country.
Merkel executed another reversal at the summit, agreeing to speed the payments into the planned 500 billion-euro permanent rescue fund barely a year after she won a deal to slow them down.
“We are still in a fragile situation,” Merkel said. ‘This situation has calmed down a bit, but the crisis is hardly over and further steps will be required to get there.’’
Under pressure from world leaders and the IMF to reinforce the European firewall, the euro’s stewards pledged to pay the first two annual installments into the fund this year. Known as the European Stability Mechanism, the permanent fund will go into operation in July.
The timing of the remaining three installments to bring it up to its 500 billion-euro capacity will be set later in March, along with a decision whether to add on the 250 billion euros left in the temporary rescue fund, the European Financial Stability Facility.
The month will also bring an austerity-versus-growth confrontation, as the signers of the freshly minted fiscal treaty weigh whether to push back Spain’s deficit-cut timetable as it struggles through its second recession since 2009.
“For the credibility of the whole operation, I think it is necessary that we maintain these budgetary targets,” said EU President Herman Van Rompuy, who was named to a second 2 1/2-year term at the summit. “If we don’t do that in a consistent fashion, then we will be punished by the markets.”
The tension is between abiding by the EU’s fiscal corset and the economic logic of forcing more cuts on a country suffering unemployment over 20 percent. After most leaders left the EU building, Spanish Prime Minister Mariano Rajoy scuttled his target of a 4.4 percent deficit in 2012, aiming for 5.8 percent instead.
“I didn’t communicate the deficit target to the heads of state, nor do I have to,” Rajoy said. “This is a sovereign decision taken by Spain.”
Spanish bonds fell today, with 10-year yields rising 4 basis points to 4.91 percent, exceeding Italy’s for the first time since August.
The next move lies with the European Commission, which will decide whether Rajoy’s re-affirmation of reaching the EU deficit limit of 3 percent of GDP next year entitles it to leniency in 2012.