Rome Summit: Adopting a Growth Plan for Euro Area

On Friday leaders of France, Germany, Italy, and Spain met together in Rome for a brief summit and agreed to promote a plan to boost economic growth across the euro area. The leaders also discussed agenda items for the 27 member countries that will participate in the EU Summit later this week.

Chancellor Angela Merkel,  Italian Prime Minister Mario Monti, French President Francois Hollande and Spanish Prime Minister Mariano Rajoy agreed to support a new growth plan that is intended to increase output in Europe’s weaker economies equal to about €125 billion ($163 billion USD), or 1% of euro area gross domestic product.

At the EU Summit on Thursday and Friday EU leaders are expected to announce the formation of a banking union, which may contain shared oversight and deposit insurance in addition to adopting a comprehensive model for the growth plan to emerge across the Euro area.

Some of the other topics that may gain traction at the EU Summit this week includes banking recapitalization by Europe’s emergency funds (EFSF and ESM)  and developing a path towards debt mutualization despite German reticence.

German Chancellor Merkel remains steadfast that Germany will refuse to embrace the concept of euro bonds until fiscal integration is achieved across the euro area. 

Merkel also opposes euro bailouts that go directly to banks and bypass European governments.

When Merkel was questioned on Friday about her opposition to the euro bailout fund directly recapitalizing Spanish banks, Merkel replied that “liabilities and controls go together.”

Merkel said she can’t support German taxpayer money being channeled directly to a Spanish bank “because I have no powers” of oversight. “I’m the German chancellor; I can tell my banks that. You would have a huge problem here,” she said according to Bloomberg.

During Friday’s press conference in Rome, the four euro area leaders did not comment about a proposal to use bailout funds to buy euro area government bonds, a move that Merkel rejects despite receiving support from Monti (Italy) and  Hollande (France).

Merkel refuses to go along with buying euro area government bonds due to concerns that buying debt will further delay the implementation of unpopular austerity reforms. 

However, borrowing costs for large euro area economies such as Italy and Spain, considered by some economists to be “too big to fail”, have risen steadily in recent weeks as investors worry those two countries may need to be bailed out.

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