Mario Monti has made quite an impact since he took over as Prime Minister of Italy last year, never more so than last night. He was either going to come out of this summit as ‘Super Mario’ or ‘Monti Python’.
Inspired by the heroics of the real ‘super’ Mario Balotelli, he pulled off a most extraordinary coup, by wielding a potential veto that made even some of David Cameron’s threatened vetoes seem reasonable.
The growth pact was something that the Italians wanted and needed. You could almost say that it had been custom made for Italy, redirecting around €120bn to promoting growth in southern Europe.
When your economy is shrinking at around 2.5% a year, that is surely something an Italian Prime Minister would grasp with both hands.
And yet Mario Monti threatened to veto it! “No, I won’t accept your money” he told Angela Merkel, “unless you back down and agree that your taxpayers will back Spain’s banks and lend my Government money”.
So far all most extraordinary. But, stranger still, in the face of such a ‘threat’ the Iron Chancellor folded.
To understand why, consider what would have happened if this summit had broken up with no agreement at all: no deal on the banks, no help for Spain or Italy, not even a ‘growth pact’ that everyone had assumed was a done deal.
When the markets opened on Monday morning there would have been carnage, a melt-down so bad that, as one economist told me this morning, there may have been no way to bring it under control.
In other words, what Mario Monti was threatening Angela Merkel with last night was the very real prospect that if she didn’t give in, the Euro may soon not exist. And that was quite a threat.
But what of the deal itself? Will it work? It is another in a long line of measures that kick the can down the road in the hope that, if you buy a bit more time, something will turn up.
We’ve been here many times before, and the amount of time bought seems to get shorter each time, but it should at least get the Euro through the summer holidays.
The central element of the deal is to undo the terrible damage that the €100bn bailout of Spain’s banks did a couple of weeks ago.
That money did more harm than good because it simply piled more debt on the Spanish Government, and made other lenders worried that, if Spain ever had to default on its debts,
private lenders would only get what was left over when the bailout money had been repaid in full.
Instead money will now be lent directly to the banks themselves, shifting all the risk onto the European (for which read German) taxpayer.
It is good news for Ireland too, whose banks should now get similar treatment.
Deputy Prime Minister Eamon Gilmore proudly declared this morning that the deal will move the burden of Irish bank debt from Irish taxpayers to European taxpayers.
I just wonder if anyone has told the Germans this. Angela Merkel heads home to address the Bundestag this afternoon, and her MP’s will have to approve what she’s done. Don’t be surprised if she runs into some resistance.
Another potential can-of-worms has been opened with the understanding that new bailouts to Spain and Italy, should they be necessary, will not carry the same onerous conditions and supervision as those to Greece, Ireland and Portugal. ‘Why not?’ they will ask, not unreasonably.
The new Greek Government is about to embark on an attempt to renegotiate their own bailout terms. Expect them to point at the favourable terms on offer to the big countries and say ‘we’d like some of that please’.
None of the fundamental issues have been sorted here: Greece is still bust, much of the Eurozone is still in a deep recession, the Club Med economies are still hopelessly uncompetitive with Germany, Spain’s banks are still insolvent, Government debt is still way to high, ‘structural reforms’ are still happening painfully slowly, if at all.
But a bit more time has been bought, and that is probably a good thing.