Despite a lack of announcements, the meeting was politically important, because it showed that disagreements over which economic growth measures to pursue go beyond German Chancellor Angela Merkel and French President Francois Hollande. While Spain and Italy supported France's proposals, the Netherlands and Finland sided with Germany. This disagreement is becoming a divide — between France as the leader of the European periphery and Germany, which is looking to keep support from the European core against a mutualization of European debt. Hollande emphasized this core-periphery division by meeting with Spanish Prime Minister Mariano Rajoy — instead of Merkel, as is the custom — before the beginning of the summit.
Project Bonds
The idea of creating project bonds was first suggested by the European Commission in 2010. The bonds aim to attract private sector capital to finance large infrastructure projects throughout Europe. The commission proposed to use 230 million euros ($289 million) from the EU budget as a guarantee to raise up to 4.6 billion euros from the private sector. The European Parliament will vote on this proposal in July. If approved, the proposal will go to a vote at the European Council.
Project bonds will not replace private sector investment. Public sector grants and bank lending will still be required to finance large infrastructure projects, but European banks currently lack the resources to lend to these projects. In most countries, the public sector is struggling with high levels of debt and has limited capacity to provide grants. Therefore, even with bonds, funding for infrastructure projects within Europe will be difficult to find.
Moreover, these project bonds are not the growth-enhancing measures that peripheral eurozone countries were hoping for. Even if the bonds are successful, only five to 10 projects will receive this indirect financial aid until 2014. In the coming months the European Union is expected to decide which projects are eligible for support through project bonds, and since this is a European Union-wide project, it is unlikely that all infrastructure projects selected will be in eurozone countries.
Even if inadequate infrastructure is part of the problem in Europe, it is far from being the main explanation for the Continent's lack of economic growth. Problems such as high unit labor costs, generous social entitlements, labor market regulations and Europe's demographic outlook will not be solved by project bonds. The growth-enhancing effects for eurozone countries will thus be very limited.
The European Investment Bank
The EIB will likely be used to finance structural projects or help distressed banks. However, the EIB may lack the funds for a contribution sufficient to mitigate the European crisis. The EIB lent roughly 60 billion euros in 2011 and suggested that it is willing to reduce its lending levels for this year to protect its AAA rating. EIB authorities fear that an expansion of the bank's nominal leverage could trigger a rating downgrade.
This means that the EIB would need more funds to become a useful tool against the financial crisis. So far, two options have been discussed. One is to ask member states to contribute a total of 10 billion euros to recapitalize the EIB. According to Spanish newspaper El Pais, the European Commission is considering a second alternative: reallocating some 12 billion euros from the European Financial Stabilisation Mechanism.
Germany has already expressed its willingness to support refinancing the EIB. The two alternatives would allow the EIB to raise between 180 billion and 200 billion euros. However, this figure is less than the remaining lending capacity of the European Financial Stability Facility and almost a third of the expected lending capability of the European Stability Mechanism.
Eurobonds
Finally, there is the controversial issue of eurobonds. Germany currently opposes eurobonds because it believes that issuing such bonds would lead European periphery countries to soften their fiscal policies. The few eurozone countries that still have a AAA rating — the Netherlands, Finland and Luxembourg — are on Germany's side, since they fear eurobonds could put their credit ratings at risk.
For countries at the core of Europe, the eurobonds could be a tool to ensure that the eurozone does not break apart. However, before agreeing to a debt mutualization, those core countries want to have more control over the fiscal policies of peripheral countries. Core countries need to be sure that peripheral countries will apply the necessary institutional and fiscal reforms.
Eurobonds also have electoral implications. German leaders, as well as Dutch and Finnish leaders, must convince voters at home about the usefulness of financing the debt of peripheral countries. This could be a difficult task while these core countries are reducing spending at home.
Even if European countries agree on the creation of eurobonds — a decision that could be accelerated if Greece leaves the eurozone — their design and implementation may take more than a year, due to the amount of technical and legal details that must be resolved. Because of this delay, the European Central Bank is still Europe's main tool against unstable markets.
Eurobonds could be created — but only after eurozone countries approve the Fiscal Compact Treaty and other requirements that the European core is going to ask before accepting a mutualization of European debt. In other words, if eurobonds are to be created they will be the result of long negotiations and they will come with certain obligations.
Editor's Note: An earlier version of this analysis incorrectly stated which countries had sided with Germany.
