Two weeks before a new summit, European leaders are under pressure to deliver a credible solution to the debt crisis after Standard & Poor’s (S&P) punished their policies with stinging credit downgrades.
Eurozone governments face an uphill battle as they scramble to avoid a messy debt default in Greece, boost a bailout fund considered too small to save bigger countries and seal a fiscal pact aimed at tightening budget discipline.
After a relatively calm start to the year, the crisis returned with a vengeance on Friday as negotiations between Greece and bank creditors on a huge debt writedown hit a snag and S&P’s downgraded nine eurozone nations.
The credit ratings agency justified its action by saying that EU policies in recent weeks “may be insufficient to fully address ongoing systemic stresses in the eurozone.”
More than two years into the crisis, the bailouts of Greece, Portugal and Ireland, the creation of an emergency fund and a slew of continent-wide austerity measures have once again failed to calm fears of a eurozone breakup.
“This is more a downgrade of the eurozone’s management of the crisis,” said Sony Kapoor, head of the Re-Define economic think tank. “Standard and Poor’s had given EU leaders fair warning, but they have wasted the month they have had to change course and come up with a credible crisis resolution strategy.”
European leaders, with the exception of Britain, agreed last month to seal a “new fiscal compact” by March to tighten budget discipline and deepen integration to convince markets that there will be no repeat of the crisis.
However, Standard and Poor’s, in addition to kicking France and Austria out of the exclusive club of “AAA” rated nations, warned that “a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating.”
EU leaders plan to discuss how to spur growth and jobs at their Jan. 30 summit, but the new fiscal treaty will also figure high on the agenda.
After years of toothless fiscal oversight in the EU, the pact would require governments to enshrine balanced budgets in their constitutions and threaten more automatic sanctions against countries that run excessive deficits.
German Chancellor Angela Merkel, who has championed stricter budget rules, said on Saturday that the downgrade means Europe must quickly implement the new treaty “and not try again to soften it.”
“The [Standard and Poor’s] decision confirms my conviction that we in Europe still have a long road ahead of us until investor confidence is again restored,” Merkel said.
The S&P downgrades meant that a fiscal pact agreed at an EU summit last month to tighten economic integration must be implemented quickly, Merkel said.
“We are now called upon to implement quickly the fiscal pact, to implement it with determination ... and not try again to soften it,” she said.
Europe’s new permanent bailout fund must be effective as soon as possible, she added.
The ratings agency’s move has also fueled doubts about the eurozone’s ability to boost its bailout fund, the European Financial Stability Facility (EFSF).
Originally endowed with guarantees totaling 440 billion euros (US$558 billion), the EFSF only has 250 billion euros left after bailing out Portugal and Ireland — insufficient for Italy or Spain if the eurozone’s third and fourth-biggest economies need help.