With the outcome of Sunday’s coming election in Greece casting shadows over the eurozone, leaders in the European Union are turning from austerity to growth and investigating the possibility of a closer fiscal union. As the clock ticked, Moody’s downgraded one Belgian and five Dutch banking groups, citing economic weakness and the continuing debt crisis.
Bloomberg reported Friday that a draft document prepared in advance of a planned EU summit meeting, scheduled for June 28–29, indicates that leaders of the 27 nations in the group plan to focus on economic growth, improved lending conditions and greater fiscal union.
“Recent developments” have indicated that it will be necessary to advance monetary union “to a further stage,” the document read in part, adding that “more specific building blocks” will be called for to more closely tie budget and banking policies among the 17 eurozone countries. There will also be a call for stronger governance of the euro. A meeting of eurozone countries is planned to follow the full EU meetings.
Political leaders in the EU “will call for further urgent measures aimed at boosting growth and jobs in Europe and enhancing the financing of the economy in the short to medium term,” the document said. Among such measures are project bonds, improving the efficiency of EU infrastructure funds and boosting the capital of the European Investment Bank.
David Mackie, chief European economist at JPMorgan Chase & Co., was quoted saying, “If that summit were to deliver a credible road map to a fiscal and banking union, it could lower borrowing costs for the periphery, as debt restructuring and breakup risks were reduced, and pave the way to a different fiscal objective, focusing on deficits rather [than] debt, and a much easier monetary stance.”
Not just coordinated action but also individual initiatives are in the planning stages awaiting the outcome of the Greek election. Bank of England Governor Mervyn King was quoted saying in a speech late Thursday that in the presence of a “black cloud” from Europe, the case for stimulus in the U.K. “is growing.” He jointly announced with the Treasury a number of measures to cope with the possibility of an escalation in the euro zone debt crisis.
He was quoted saying, “The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead.” Rather than wait for the outcome of the Greek election, he announced a looser policy and the activation of a sterling liquidity facility by the central bank to aid banks. In addition, he said that within weeks a credit-easing operation will begin that could increase lending in the British economy by 80 billion pounds ($124 billion). Reuters reported that Andrew MacDougall, a spokesman for Prime Minister Stephen Harper of Canada, said Canada is “ready to act” should the crisis deteriorate further or if there is “an external shock.” While the Bank of Japan had not yet changed any policy at the end of a two-day meeting, it was reported to have a plan in place should it be needed after the Greek elections. China and India are also preparing contingency plans.