Breakthrough EU Summit Decision Looks to Ease Debt Crisis

This morning marks a surprising twist of events for the EU debt crisis, as European leaders reached an agreement easing the requirements on debt-stricken nations requesting economic aid.

Taking a Team Approach

The decision, which came after 14 hours of discussion, will utilize the Eurozone’s rescue resources to strengthen bond markets and directly fund banks – without forcing recipient nations into harsh austerity measures or economic reform. It will also introduce a supervisory governing body under the European Central Bank by the end of this year. Through the ECB, the European Stability Mechanism will be used to directly recapitalize banks – and countries can request aid without adding to their deficits or being subjected to the oversight of the troika – a condition previously begrudgingly accepted by Ireland, Greece and Portugal in exchange for their earlier bailouts.

Nations who apply for aid will now be required to sign a memorandum of understanding, stating their policy commitments and establishing a timetable for repayment. The goal is to establish a closer fiscal union amongst EU countries.

Too Big To Fail?

The new approach is a boon for Italy and Spain, who teamed up to play hardball against Germany by refusing to sign a 120-billion euro growth package until the softer stance was implemented.  It’s a big concession for the pro-austerity Germany, whose Chancellor, Angela Merkel, is probably the most vocal supporter of economic restrictions for countries requiring aid. Merkel has long advocated for harsher economic recovery measures – such as nation leaders conceding control of their budgets and agreeing to joint debt issuance – steps some experts say is the only true way to end European debt woes.

Despite backing down, however, Merkel has maintained that help would not be condition-free. “I think we have done something important but remained faithful to our philosophy,” she stated to the press. “… no benefit without counter-benefit.” While she was put under further pressure to relent at the summit as France leader Francois Holland backed Italy and Spain’s demands, her new stance is an abrupt about-face.

The changes will be of particular benefit to Spain, who formally asked for a 100-billion euro bailout earlier this week. Financial markets and investors are also responding positively to the news – Italian and Spanish bonds dropped as a result, and the Euro rose against the dollar by 1.2 % to $1.2628.

Will these relief efforts stick around longer than previous attempts? Today has an optimistic outlook – but time will tell.

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