After a dramatic marathon summit, euro area heads of state and government have come up with a significant Euro Summit Statement. It is difficult to form a final judgement on the overall package until all details are clarified, which will certainly not be before the Cannes G20 meeting. Nevertheless, here is my first take on the package.

1) Greece: The debate on Greece has finally moved in the right direction. Growth assumptions and expected privatisation receipts are more realistic than before thanks to the more realistic analysis of the Troika. The 50 percent haircut offers a chance of finding a viable solution for Greece. We will have to review all the exact numbers but it appears that significant IMF financing is still needed to meet the financing needs as computed by the Troika. But the envisaged debt reduction is only a necessary, not a sufficient condition for putting Greece back on a sustainable path. Structural challenges for growth and fiscal consolidation in Greece remain and are huge. The Summit Statement therefore rightly puts a lot of emphasis on the need to have a significant permanent staff in Athens in order to help Greek authorities in the implementation of the reforms.

2) EFSF: It is welcome that there has been an agreement on leveraging the EFSF in principle. The current size of the EFSF would have been too small to avoid contagion. It remains to be seen which of the proposed solutions will ultimately be pursued (if a choice is made) and how much money can be raised in the capital market. The Cannes G20 summit will also be decisive as regards the contribution from non-EU countries. Overall, we will only then be able to say if enough resources are available either through the EFSF or with the support of IMF precautionary facility to limit contagion. It appears likely that the European Central Bank will have to continue to be involved as ultimately only the ECB can provide unlimited liquidity ( See also the column Why we should listen to Tim Geithner by Guntram Wolff and There is no such thing as EFSF leverage without the ECB by Shahin Vallée ).

3) Bank recapitalisation: It is welcome that bank recapitalization is high on the agenda and a decision has been made to move forward on this. The intention is that banks increase their Tier 1 capital by June 2012 to 9 percent and that access to short term funding will be improved in a coordinated way. The headline figure of 109bn appears to be on the lower side of what will ultimately be needed. It is also deplorable that again the stress test that form the basis of the recapitalization are very broad and do not constitute true and intrusive tests of the strength of individual banks on all potential risks.

In the financial assistance countries, funds from the programmes will be used for providing the capital. For the other countries, the capital should be raised in the capital market, if this is not possible, national taxpayer’s money should be used and the EFSF is only the last resort. The heads of state and government clearly state that they wish the strengthening of balance sheets to be achieved by raising capital, not by decreasing lending. This is again an important detail but we do not know how governments wish to make sure that a credit crunch is avoided. If the pressure is to come from national supervisors, there is a significant risk that banks will deleverage their cross-border activity. This could lead to a fragmentation of banking activity and a retreat within national borders. It will be of utmost importance that this path is not taken. In addition, the commitment by governments to help banks to raise more term funding through guarantees is likely to be very positive but the nature and effectiveness of the coordinated approach that it calls for is very unclear at this stage.

4) Governance: The Summit Statement includes a number of very important improvements for the governance of the euro area. The six-pack and the European Semester is rightly put in the center of the ex-ante surveillance. It is also welcome that the Eurogroup Working Group chair becomes a permanent Council official, that the lines of reporting become streamlined and clearer and that the Head of the Euro Summit will meet monthly with the President of the European Commission and the Eurogroup. Crucially, limited and quick Treaty changes remain on the agenda. It will, however, likely turn out to be insufficient to envisage limited Treaty changes only and more fundamental Treaty changes will be needed.

5) Italy: The key to the success of the euro will be the ability of Italy to deliver on the promised reforms. The Euro Summit rightly put a lot of emphasis on the necessary reforms in Italy and the clear Italian letter of intent is a milestone for the euro area. However, the Commission will have to closely monitor progress in the implementation of these reforms. The Italian economy needs to be made fit for the euro. Unleashing the sources of Italian growth is central.

Overall, the package is a step in the right direction but certainly falls short of what ultimately will be needed to put the euro on a sustainable path. In particular, it fails to agree on the single most important reform needed: the creation of a true euro area banking supervisory and resolution authority. The second most important element, massive structural reforms, is clearly important but for this all will depend on the ability of national political systems to deliver.