With the frightening fragility of the Greek economy and the worry that the debt crisis there could spread to larger countries throughout the European Union, the European Council is rallying to put together a debt crisis bailout package. The announcement came during the recent Euro Summit with high targets for Greece’s economic recovery a big part of the plans.
The national debt in Greece, for example, should be reduced to 120% of GDP by 2020. The solution revolves around a combination of private sector involvement and contributions from European Union member states (thought to be in the region of 30 billion euros), however, there is also the possibility of contributions from China to the overall package.
The summit also agreed to strengthen the resources of the European Financial Stability Facility to create a buffer to ensure that the debt crisis doesn’t spread. The available lending capacity will be multiplied by 5, while the guarantees required by member states to tap into the facility will not be extended.
However, it would appear that the banking sector will also face changes to take the strain with the temporary measure to bring the level of their highest quality capital to 9% by June 2012. The assumption is that this will provide the production requirements to fuel economic growth. A bonus and dividend payment constraint should be put in place to ensure that bands adhere to the 9% targets.
This latter point is the type of banking constraint that has been called for by the public throughout the economic turmoil of the last few years. High dividends and bonuses at a time when banking activity is a big contributor to economic instability is gratuitous in the extreme. Seeing them constrained to promote contribution to economic recovery could be considered a refreshing development.
In addition to the new bailout package, new measures to improve coordination and surveillance throughout the Euro Zone. However, the big question is will they be rigorous enough to detect further slippage potential before it is too late.
Either way you look at it, it is clear that governance at both the nation and union level has previously failed to safeguard European economic stability. However, do the steps in the right direction go far enough to shore up a very heavy and unstable ship.
