As if starring in some movie thriller, European leaders will keep us in suspense until heads of state meet once again next Thursday and Friday. The anticipated meetings (Euro Group, Ecofin and Roma) are not going to end up shedding light on any solutions, but they will make some progress. In classic EU style, the tough talks are filled with rhetoric, but slowly leading to concrete action. Some aspects of the conversations are clearing up, although we might not like the results.
A higher VAT will be imposed on Spain, although Rajoy has resisted raising it. Meanwhile, Merkel refuses to purchase Spanish and Italian debt despite the possibility that their credit markets will close. The next step would be a bailout for both countries. Spain needs help, but Germany is not granting it. That said, Merkel is accepting a 130 billion euro plan to propel growth in the EU.
The aid is good news, although people anticipated it. While the Germans focus on long-term development, many countries, including Spain, need near-term solutions. Minister De Guindos is involved in the near-term solutions. He's asking for Spain's financial sector bailout to be completed as soon as possible, but the Minister of the Economy will not sign any contracts until conditions are clarified.
For example, to calm investors, it's important to not use the ESM fund to finance the bailout, because this fund uses a hierarchical structure to reimburse investors should a bank receiving funds default in the future. But it appears that the money will go to this fund and then to the banks. Although rapid action is the most important goal for Spain, Germany wants banking and fiscal union. A resolution will likely be reached during the next week.
