Germany Cedes Some Ground in Steps to Bolster Euro

June 30, 2012


BRUSSELS — European leaders went a surprising distance on Friday toward restoring confidence in the euro, taking a significant step toward economic integration and easing market pressure on Spain and Italy, as what appeared to be a new coalition of forces pushed Germany to bend.

But questions quickly arose about how far they still had to go, leaving unresolved the most fundamental problems of the euro zone, its structural imbalances and lack of a lender of last resort. While Chancellor Angela Merkel of Germany ceded some ground by agreeing to direct refinancing of banks, she did not yield on the issue of sharing debt burdens, which is highly unpopular with German voters but is seen by many economists as a necessary step in saving the currency.

“In a nutshell, we think that the Europeans have cracked open more doors than we thought, but they still have a lot on their plate,” said Gilles Moëc, an economist at Deutsche Bank in London. “The discussion on fiscal integration and debt mutualization has not started in earnest.”

At the latest all-night meeting since the beginning of the long euro crisis, the leaders made a breakthrough toward more central control over their banking system, a crucial aspect to the stability of the common currency. They also moved swiftly to grant their bailout funds more flexibility to come to the rescue of Spain and potentially Italy, the fourth- and third-largest economies in the euro zone, respectively, because they are too big to fail.

But the meeting also signaled an important shift in the foundation of the euro zone, with France, under the new Socialist president, François Hollande, breaking from the familiar lock step with Germany. Working more in partnership with Prime Minister Mario Monti of Italy than with Ms. Merkel, Mr. Hollande helped to isolate Germany and broker the deal for Italy and Spain, which breaks a previous German taboo on direct recapitalization of ailing banks, and makes a beginning, however small, toward pooling liabilities.

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