German Chancellor Angela Merkel defended concessions made to struggling Spain and Italy at a European Union summit on Friday as she prepared to address lawmakers at home, where media headlines loudly proclaimed her political defeat.
Merkel had been opposed to some of the measures that she and the other 16 leaders of the euro countries agreed on Friday. They include allowing Europe’s bailout fund to give money directly to a country’s banks, without imposing strict austerity conditions on the government.
She insisted her tough-love approach was intact, but German papers on Friday were damning, reading “Merkel buckles” and “Merkel’s defeat.”
Leaders also agreed that countries that pledge to implement reforms and budget policies demanded by the EU’s executive Commission could tap rescue funds without having to go through the tough austerity measures that Greece, Ireland and Portugal were forced to accept in return for their bailout cash. That could make seeking outside help more politically palatable to governments such as Italy’s, but also leaves Merkel open to accusations of watering down her insistence that aid must come with strings attached.
Markets cheered the agreement, with the DAX up 3.6 percent in afternoon trading in Frankfurt, Spain’s Ibex up 4.7 percent and Italy’s FTSE-MIB up a stunning 5.3 percent. The euro up 2 percent at $1.2680.
Crucially, borrowing rates for Spain and Italy dropped sharply. The benchmark rate on Spain’s 10-year bond dropped 0.45 percentage points to 6.45 percent. Italy’s fell 0.22 percentage points to 5.87 percent.
Merkel told Parliament it was a “sensible decision” to allow countries that pledge to implement reforms and budget policies demanded by the EU’s executive Commission to tap rescue funds without having to go through tough austerity measures – a concession to Italy in particular.
German media headlines portrayed the outcome as a political defeat but Merkel insisted that view was a “misunderstanding.”
I’m not sure about the wisdom of simply handing money over without preconditions. I think long term , this is a mistake, and simply means many people and countries are doomed to repeat the global recession again. Short term, there will be additional liquidity. We’ll see how all of this works out.
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