With Germany finally on board, EU can now go beyond just cuts

Leaders of the eurozone’s four biggest economies – Germany, France, Italy, and Spain – agreed today to jumpstart growth of the besieged 17-member group with a roughly 130-billion-euro ($163 billion) package.

“I absolutely agree with what everyone else here has said – to devote 1 percent of the GDP of the European area additionally to growth, to efficiency in growth, and to investment,” German Chancellor Angela Merkel said in a press conference in Rome after the meeting. 

The comments mark a turning point in discussions; until today, she resisted pressure from the other three countries to budge on her austerity-only recipe for exiting the crisis. The meeting, dubbed the “big four mini-summit,” was geared toward building consensus ahead of next week’s European Union summit. And while many of the details are still pending, the fact that Germany agreed to the French-proposed growth stimulus package is a good sign.

As Chancellor Merkel said herself, “That is the genuine signal that we need.” French President François Hollande also highlighted the breakthrough. “Who would have imagined a few weeks ago that [the issue of] growth would be on the agenda of [next week’s] summit?"

The pressure mounted on Merkel after the International Monetary Fund issued a blunt and forceful statement yesterday – apparently directed at Merkel – that made an urgent call for more fiscal integration. It also supported issuing eurozone debt in order to pool together risks and in doing so lower the lending rate for the troubled countries, while increasing it for fiscally conservatives. 

“The euro area crisis has reached a critical stage,” the IMF statement read. “Despite extraordinary policy actions, bank and sovereign markets in many parts of the euro area remain under acute stress, raising questions about the viability of the monetary union itself. A determined and forceful move toward a more complete economic monetary union, particularly a banking union and more fiscal integration, is needed to arrest the decline in confidence engulfing the region.”

Meanwhile, Spain, at the heart of the current market uncertainty, remained opaque about the extent of its financial needs. It has publicly acknowledged that it will need a bailout for its capital-deprived banking sector, but it has been evasive about just how large that bailout needs to be. An independent audit of Spanish banks yesterday estimated the financial sector will need between 51 billion euros ($64 billion) and 62 billion euros ($78 billion) to survive the most adverse conditions. 

The 16 other eurozone countries, especially the German-led fiscal conservative bloc, pressured Madrid this week to make an official request for part or all of the 100 billion euro ($125 billion) rescue it was offered by the eurozone on June 10.

Spanish Finance Minister Luis de Guindos, speaking from Luxembourg after meeting with his eurozone counterparts, postponed the official request, which was largely expected today, until June 25. He also warned that the amount, terms, and list of banks being bailed out would not be disclosed until July 9.

Luxembourg’s prime minister and head of the Eurogroup, Jean-Claude Juncker, had asked Spain to make its request today. Mr. Guindos took a swipe at him, denying there was any tension but said “sometimes Mr. Juncker needs to have things explained."