Underwhelming

The EU summit official statement is out, to say it is underwhelming is to be too kind – there is very little meat on this bone, the omissions are glaring and the longstanding promises to “agree to move towards” various goals of fiscal and economic coordination remain unchanged with little visible progress. Europe, the EU, and the eurozone (EZ) quite clearly have their work cut out for them – the task of achieving a stronger economic and monetary union with “fiscal discipline and deeper integration in the internal market as well as stronger growth, enhanced competitiveness and social cohesion” within the euro area is no small feat. The most noteworthy quotes from the EU statement:

“A mechanism will be put in place for the ex ante reporting by Member States of their national debt issuance plans.”

“As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed. Steps and sanctions proposed or recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed”

“For the longer term, we will continue to work on how to further deepen fiscal integration so as to better reflect our degree of interdependence.”

The facts remain the same, the euro is a currency without a country which has been adopted throughout a monetary zone with vastly disparate economic fundamentals & cultures (Spain’s example shows the eurozone’s weaknesses/vulnerabilities) – it will be virtually impossible for the euro to survive in its current form, credit writedowns and a smaller monetary & fiscal union will be required for the longer term longevity of the euro currency.

It has become quite clear that the ECB stands ready to take additional accomodative measures to combat the eurozone debt crisis, however, the ECB is painfully behind the curve and at great risk of losing control of the situation. A currency relies upon confidence – with deflation beginning to set in throughout the EZ periphery, reports of euro note holders spending currency printed in Italy/Greece/Spain etc. while hoarding German euro notes, and bank runs in Greece, it appears that confidence is sorely lacking. The longer the ECB waits to deploy its “extraordinary” policy tools (unsterilized bond purchases/interest rate caps on sovereign yields) the more likely a post-default recapitalization scenario becomes.

“The present seemingly unstoppable process towards further financial transfers will generate tensions of an economic and especially political kind.  The longer this process is characterised by unsound conduct of individual member countries, the more these tensions will endanger the existence of EMU…….A political union worthy of the name cannot be set up by stealth,” - Key euro architect & former Bundesbank Chief Economist Otmar Issing

 

 

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