One night to save Europe

European leaders have agreed a package of measures to rescue the troubled eurozone and manage the debt crisis.

Their ‘three-pronged’ agreement falls short of the ‘bazooka’ suggested by David Cameron, but covers the main areas required to keep Europe out of immediate danger.

Private investors with Greek debt have reached a voluntary agreement to accept a 50% ‘haircut’, a loss on the debt they hold. This means that Greece has defaulted, in all but name.

Additional bank capitalisation measures were also announced, which will help the banks build a capital buffer against further sovereign debt losses.

Finally, the main European bailout fund will be reinforced to a level of around £880bn. This will be achieved through some sort of gearing of funds, although the details remain unclear.

A framework for these three measures will be put in place by the end of next month.

Much of the success of these agreements will depend on where the European economy goes from here.

Without sustained economic growth, the budget deficits in many of the troubled European economies will continue to widen, and the sovereign debt issues will quickly re-emerge.

Investors have reacted positively to these agreed measures, with markets across the world up sharply in immediate response. Whilst the finer details of the deal will not become clear for several weeks, the overall shape of the agreement has been well received.

It will be very interesting to see where Europe goes from here. In the short term, eyes will be on the economic growth figures measured by GDP, as well as country-by-country reactions to further austerity measures.

Longer term, there is likely to be further political wrangling in order to reach the additional fiscal unity measures needed to secure the future of the eurozone.

Whether or not Britain plays a central role in Europe in the future remains to be seen. Regardless of that outcome, Europe is an important trading partner for the UK and our economic future is closely correlated with what goes on across the Dover Strait.

Photo credit: Flickr/Albertane