Thursday, Germany lost twice against the Italians: once for
the euro 2012 soccer cup semi-final and then, later during the night, when the Italian
PM Monti’s (and Spanish PM Rajoy) blitzkrieg won over frau Merkel. He played
tough by simply refusing to sign any agreement until Germany
agreed that the eurozone must jointly back Spanish banks without Spain
having to guarantee the deb.
1. The agreement
- setting up a single European supervisory mechanism for banks under the ECB control
- ESM allowed to directly recapitalize banks
- Possibility for countries which are complying with common rules, recommendations and timetables, to make use of the existing EFSF/ESM instruments to stabilise markets. Financial assistance to Spain will be provided without seniority status for the financing provided by the EFSF/ESM.
- mobilizing around 120 billion euro for growth measures:
- A 10 billion euro increase of the capital of the European Investment Bank implying a lending capacity by 60 billion euro.
- The other 60 billion euro comes (i) from the reallocation of unused structural funds (55 billion), and (ii) from the pilot phase of Project Bonds to be launched this summer and targeted at key initiatives in energy, transport and broad-band infrastructure (4.5 billion).
- Adopting a Financial Transaction Tax by December
2. What’s next?
Ireland must rejoice since they now can lineup
to require the same favorable treatment, which cost is put at EUR 64 billion.
European (read mostly
EZ) taxpayers are on the hook thanks to the pan-EZ mutualization of the
European banking sector rescue. Do not misread me, I strongly believe that
for a monetary union to survive (if not thrive) the banking sector MUST have a
single supervisory board and the costs must then be shared. However, we are mutualizing liabilities before
having had any chance to mutualize benefits (and will probably share none,
if any in the future) at nil cost for banks; in a capitalistic environment, the ones who rescue an ailing company
take control: nothing near this simple and sensible criteria here… I also
notice that no FDIC equivalent is set up
to guarantee deposits with no limit on the number of accounts guaranteed one
can hold.
The question remains: is this the first step towards the
mutualization of sovereign debt? I cannot believe that Germany would carve in; if they do, the credibility
of Europe would be jeopardized.
The direction towards
fiscal integration is going ahead but many obstacles remain which let me
think that the success is far from being certain (I am in fact very doubtful).
Fiscal union without
social union will fail as the EZ failed (whatever politicians do to
disguise it, it is a failure). The EU loves, and writes in many of its statements,
the words “best practice”: ask the French if best practice is 67 years old retirement
age, no minimal wage, 40h a week working time, etc.
What last week
agreement achieved is reassuring markets for some time by reducing the amount
of money Club Med countries will devote to save their ailing banking sector:
Spain
has gone from 100% down to 12%. Conversely, France is adding EUR 20 billion of
liabilities. Remember my words for a rather long time, France is really sick economically and worse than
Italy.
Today, the French Audit Court is publishing a report
that I will carefully read; the first comments are rather straight to the point:
EUR 40 billion need to be found until end
2013 to abide by France’s
commitments on deficit reduction…
Markets will however
go back to the reality of the EZ: a monetary union with a widening competitiveness
gap. NOTHING, I repeat nothing, of what was decided last week is addressing
this gap; the EUR 120 billion to spur growth via infrastructure
investments, particularly in distressed European countries, will take years to
bear fruits and 1% of EZ GDP split over 5 or 10 years, with nearly nothing in
2012-2014, is not going to help them drive their way out of recession.
The core of the problem is still pending: lack of
competitiveness of Southern Europe versus Northern Europe.
As a matter of fact, French will
never accept a 25-30% decrease in wages to become competitive again:
understandably they will always prefer a
currency devaluation than a salary devaluation (and no, the effects are not
the same for the population concerned).
Conclusion
Yes, this time is
different because Germany
bent before blackmailing, but no, it is not different because the roots of the
problems remain: lack of competitiveness and structural trade deficits that
act as a drag on growth which is the only way out of the crisis. The necessary structural
adjustments (lengthening of working hours, postponing the retirement age, reducing
the share of the public sector in the economy, etc.) will only be accepted by
the population if there is some form of growth. Austerity to bring public
finances under control without devaluation is a death spiral – see Greece.
As reported by Bloomberg: “the EU’s two rescue funds may
only amount to about 20 percent of the outstanding debt of Italy and Spain,
limiting the ability to lower the nations’ borrowing costs.”, not mentioning France.
Source:
European Council 28/29 June 2012 – Conclusions
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf
Remarks by President Herman von Rompuy following the
European Council
http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/131390.pdf
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