EU surprises, experts ask for prioritization of key issues

Going against expectations, European leaders surprised the market with some decisive action that allowed markets to rally quite a bit. After the leaders decided to sort out Spain and Italy's debt woes, the global markets saw an upside. However, Trevor Williams, Chief Economist of Lloyds Bank tells CNBC-TV18 that he is not very enthusiastic about it.

According to Williams, it looks encouraging on the surface but, the huge amount of work that needs to be done to make the comments deliverables appears difficult. Williams is in favour of tackling the underlying issues plaguing Europe, which he believes the European leaders are not taking care of.

Sarah Hewin, Regional Head of Research - Europe, Standard Chartered Bank agrees with Williams about giving priority to tackle the fundamental problems. However, she feels that there has been some progress in the mid-term problems arising from the spiraling borrowing costs of Spain and Italy, two major economies within the 17 nation currency block.

Hewin also think that a common banking supervisory body can actually help to address the troubles faced by several banks within the euro zone.

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying videos.

Q: Are you pleasantly surprised or are you still playing this skeptic?

Williams: I think on the surface a few things were said which are encouraging, but I don't think that if one looks at the detail and the amount of work, which needs to be done to make some of those comments deliverables and the situation has changed enormously. I also don't feel fundamentally the underlying issues are actually being tackled at this summit.

Q: What do you believe is lacking at the fundamental level?

Williams: Ultimately these debts have to be either repaid and some form of reform has to take place. More importantly, there are two other issues that have to be tackled. One is in the short-term about who takes responsibility for these debts.

The second most important thing of all is who deals with the underlying structural issues which led to the current situation of slow growth in some economies within the euro zone. The high debt problems in other economies and how sustainable these positions are without some fundamental reform needs to be dealt with. It will take a long time to have an effect.

Q: Are you simply encouraged by what took place over the last two days because the market seems to be more than encouraged or are you focusing on the lack of fundamental solutions, as Trevor is?

Hewin: I think that there has been some progress and it is with the mid-term problems of rising borrowing costs for Spain and Italy. But, I agree with Trevor that there are fundamental problems that need to be tackled.

The euro area have decided to look ahead to the long-term, moving ahead with the fiscal union and the banking union. To an extent, I think there is certainly the blue print for those that does address some of the fundamental issues. The question is that how quickly it will proceed down that route and if in the interim there is an escalation of the crisis, which means that the emergency funds too have to be drawn on.

Q: Let me talk a little bit about that banking union you alluded to. What do you make of the fact that they have suggested a common banking supervisory body and once that body is in place they could work on mechanisms to allow for the direct recapitalisation of banks. One analyst we spoke to said that this could mean making ECB the Fed of Europe, would you agree with that?

Hewin: It's probably a good idea if you have a common supervisory body. If we look at problems that have emerged across the euro area and indeed across the EU as a result of the difficulties that the banks have had, then having a common supervision may well address those.

Of course you have got to take it across the board of banks as well and arguably, the best way to cover those is through one particular body. The euro area, the negotiations last night really tied that in with allowing the bailout funds to be tapped for direct recapitalisation of the banks. So in two ways a single supervisory body then that bailout support won’t be forthcoming and it will have to come through the EFSF.

For Spain this is probably a significant benefit and it's a step forward. It means that the Spanish government doesn't have to load-out with additional debt and it could well offer some respite for the Irish government which took on board the liabilities of it's own banking sector.