The past two weeks have seen the increasing threat of financial turmoil in both the EU and the US. On 21 July, Eurozone leaders agreed a new package of measures, aimed at shoring up the Euro. At the same time, the US appeared no closer to internal agreement on raising the debt ceiling. The deadline is 2 August.

The emergency summit of Eurozone leaders on 21 July produced a number of outcomes:
1. Greece is to receive a second bail-out from the EU and IMF, of €109 billion;
2. An additional €37 billion is expected to come from the private sector;
3. The repayment schedule on Greek loans is extended from 7.5 years to between 15-30;
4. The interest rate on all Greek loans is to come down from 5% to 3.5%;
5. The new repayment schedule and rate is to be applied to Ireland and Portugal too;
6. The European Financial Stability Fund (EFSF) is given powers to act pre-emptively in states as well as financial institutions (banks) and, as needed, markets.
Reaction
Global markets have reacted with cautious optimism to what is really a story of two halves: Greece and the broader mechanisms of the Eurozone. In what was clearly a well-rehearsed line, every leader emphasised Greece was a unique case, and that the second bail-out was therefore a unique response, but well deserved. Greece had made a lot of effort to meet its obligations and change its ways, and therefore was worthy of a second round of help. In order to ensure it remained unique, the lower interest rates and extended schedule would be applied to Ireland and Portugal. The second common line was that the new powers given to the EFSF are anything from game-changing to historic, since they potentially herald a European IMF, as President Sarkozy put it.
Analysis
Though the real driver of the summit was a dread of contagion, it was the forbidden word. Instead, much was said about solidarity and determination. The first was palpable: whether driven by empathy, fear or calculation, the decision to stick with Greece was an act of solidarity, not least because there is no clear way to remove it.
Determination, however, remains qualified. There was clearly a determination to do something together, but not too much – or at least not in a way that national electorates would deem too much. At least not publically. For the harsh reality is that it is becoming increasingly difficult to understand the evolving nature of the EFSF, or how it is meant to work with the ECB, and how they will interact with states and the Commission. In other words, in grand EU tradition, ever more institutions are being created behind which politicians can hide, promising their voters everything is being done at a national level while allowing ever more to be done at the collective one.
THE EUROZONE SUMMIT
EVERY LEADER EMPHASISED GREECE WAS A UNIQUE CASE, AND THAT THE SECOND BAIL-OUT WAS THEREFORE A UNIQUE RESPONSE…

Will it work ?
The Eurozone summit has bought time: it most definitely has delayed the crunch time in Greece and possibly staved off contagion, at least over the summer. But since a second bail-out was necessary, this is an expensive summer holiday for the European tax-payer, and unjustifiably so: from the start of this crisis it was clear fiscal mechanisms of some sort were necessary to make a monetary union work. The adamant political refusal to accept this has meant that much of the hundreds of billions spent over the past eighteen months on Greece, Ireland and Portugal – plus the costs of shoring up the currency – could have been reduced, the money put to better use elsewhere, and the EU kept more intact.
The core questions were as clear then as they are now, namely: will the Eurozone establish itself as a true currency, establishing fiscal arrangements – or will it dissolve into history, taking the EU with it? To date, the answers delivered by European leaders, in and out of summits, have been “sort of yes” to the former, and “no” to the latter. At the summit of 21 July the answers were “ok, yes, but don’t tell anyone” and “absolutely not”. If the markets accept that line, the Euro will slowly rally, which is what most leaders want: a fast rally would make it too expensive.
THE US FINANCIAL CRISIS
The summer rush has wrung a deal out of EU leaders, and the heat wave in the US will probably do the same there. The Eurozone has been saved, at least for now – and possibly for the duration. Ironically, the ungainly and expensive manner of doing this, spread over eighteen months and involving four bailouts (two to Greece), has effectively transformed the Eurozone precisely into what its weak leaders keep promising it will not become: a transfer union, in all but name.
Meanwhile across the sea, the official transfer union of the US seems to be in gridlock, stuck on narrow ideology while near drowning in a sea of debt. Worse still, due to the election year the most that can be hoped for is immediate relief since all wider agreements will be shot down in campaigning. A hard year is ahead.
CONCLUSION
The US crisis is, in many ways, more serious: the immediate problem is an inability to agree between Democrats and Republicans on raising the debt ceiling. If no agreement is reached by 2 August, the US will default, the ratings agencies will all downgrade it, and a crisis of some sort is therefore deemed inevitable. The impact of such a crisis would immediately reverberate far and wide, not least because China is the chief holder of US debt.
In reality the debate is potentially irrelevant, since it is about allowing the US to borrow even more in addition to its massive outstanding debt, which is now in excess of US$14 trillion2. The core of the disagreement is not on the specific act, but on debt reduction measures necessary to calm the ratings agencies and markets. Debates on these appear stuck: Republicans demand budget cuts while Democrats demand higher taxes. Since the US is heading into an election year, and neither side would wish to take the blame for the US defaulting, there are finally signs the two sides will agree on the raise before the deadline, and possibly also on a package of measures.
However, precisely because it is an election year, any such agreement should be taken with a large pinch of salt: rather than enshrined, all its faults will be held up by both sides. Most probably it will therefore not be enacted, and the sides will be back at the table to try and raise the ceiling again before too long, with the debt growing all the while.

Dr Ilana Bet-El,
Senior Policy Advisor