The European Council started yesterday in the classic EU style of not coming up with any concrete agreements. Although it was said that Spain would not be the focus of the Council's discussions, in reality Spain figured prominently in many of the conversations between heads of state.
Before the meeting, Merkel and Holland made their different views very clear. While Merkel talked about the need to grant the EU the power to intervene in national budgets (an issue not included on the day's agenda) Hollande called attention to the need to specify the conditions for a Spain bailout. Hollande developed his position during his last meeting with Rajoy.
Both Rajoy and Hollande agree that the solution for our country is to ask for a line of credit that leads to an ECB intervention, lowers our risk premium and allows Spain to get reasonable financing rates. The idea is to not use ECB aid unless absolutely necessary. The problem is that Merkel refused, because that implies less-demanding conditions for countries asking for aid and, most of all, because Germany's central bank has rejected the proposal for an ECB intervention. Attempting to undermine this position, Hollande wants to meet face to face with Rajoy and Monti. To do that, it's necessary to include Italy in the request for Spain's line of credit and in doing so to end the euro crisis.
As European leaders settle their differences, the markets believe that the threat of the euro's collapse is real and that Spain needs a bailout in any form, sooner rather than later. The only tasks left are to clarify conditions for Spain and Italy and soften resistance from Germany.
