Today there will be plenty of spin around, following the E85 billion bail out agreement (Part 2) for Ireland. There is a sense of deja vu, as we had similar spin before after the previous meeting which we were told had saved the Euro and stopped the contagion.
We need to check the small print over the future bail outfund for Euro members after 2013, the permanent replacement for the Stabilisation Fund. Will the UK be out of this, as most Conservative MPs wish? The government implied to us when trying to sell the Irish loan that The UK was just going to help a near neighbour. They hinted that the UK would not be bailing out other countries later. There will be disappointment and votes against if the UK is expected to become a permanent member of the Euro rescue club when we are not members of the currency itself.
The announcement of the new bail out fund can itself be read two ways. Governments hope it will be seen as a sign of strength, a symbol that there is a long term intention to save the Euro with big money to back it up. Critics may say it shows that the governments recognise they have not yet fixed the problem, and see the need for more bail outs stretching into the future. The way to save the Euro is not to keep lending more money to overborrowed countries or weak banks. The way to solve the problem is to stop the countries borrowing too much in the first place, and to regulate the banks so they have strong balance sheets, not weak ones.
What the politicians say about this package matters much less than what the markets do. I do not expect the borrowing rates for Portugal, Greece and Spain to suddenly snap back into line. The Euro itself is falling this morning , which will help a little. The Irish package partly vindicates the markets. The markets said Ireland needed a bail out as it could not borrow enough at low enough rates in the normal way. The EU has now lent it more at rates well above German Euro rates. In other words the EU has accepted the idea that Euro sovereign debts have different values depending on which country we are talking about. The EU has decided that Irish sovereign debt should require an interest rate of more than twice the German level, closer to the rate the market says is right.
Taxpayers in the countries having to make the loans may well object to being paid less than the market rate for the risk they have to run. The Irish may well feel hard done by for having to pay a higher rate than the EU charged Greece,a rate which makes restoring sense to their public finances more difficult. No-one should feel good about this messy compromise. The questions to ask are how much more pain will the EU inflict on Euro members, and can the non members avoid being dragged into the crisis?