The president of the European Council, Herman Van Rompuy, has called for an emergency government summit on Thursday to discuss “The financial stability of the euro area as a whole and the future financing of the Greek programme.”

Last week investors were left more nervous over the Europe’s financial solidity, after the results of stress tests conducted on banks all over Europe were revealed. It seems that whilst individual banks performed surprisingly well, there were signs suggesting a high systematic risk across Europe. As a result, investors are demanding crippling interest rates to take on the Spanish and Italian debts. This has had a horrendous effect on Italian and Spanish borrowing costs as they have soared to new heights resulting in the option of a default or bail out becoming inevitable due to the size of the interest payments.

There are few realistic options now available, one of which is to recover the idea of “euro- bonds”. In other words, combine all the debts held by nations in the eurozone to make one, much larger debt. The new consolidated debt would be more manageable and would not seem as daunting when compared with the levels of debt held by the US, the UK or Japan. However, it would also mean higher interest rates for Germany and raise many other political issues. Whilst the Italian Finance Minister, Giulio Tremonti, is backing this move, Germany is still negating the notion.

It is at Thursday’s meeting that the European leaders will have to decide which turns to take to begin the long road of financial recovery. If they don’t the problem could easily spiral out of control.

Want to learn more?

Subscribe to our newsletter to get accounting tips like this right to your inbox

About The Author

Lee Murphy

MAAT and ICPA accountant, with a passion for making accountancy and bookkeeping accessible. Other interests include cloud-based software development for web and mobile access, keeping fit, reading, and entrepreneurship.

More posts by this author