Opinion Sur
Recession does not fold in Europe. Particularly, unemployment in the Euro Zone set a new historic record again after reaching 11.1%. Evidence of the profound deterioration added to extra-zone pressure, including President Obama and the International Monetary Fund, mobilized the bureaucratic scaffolding of the European Union. With the measures adopted in the Brussels Summit and the fall in the interest rate announced by the European Central Bank to a 0.75% -the lowest level since the EU was formed- a certain regain of trust was achieved. Markets celebrated with sharp rises the Monday following the Summit but the thrill caved in less than a week. The question is, how much of that trust will live on in a few months or perhaps in a few more weeks? I believe that if the process of transformations towards a Fiscal, Banking and Politic Union supported by a strong statutory base does not continue, the situation could worsen again. Let us reflect upon the accomplished improvements and what was left in the Summit’s agenda to be passed in upcoming meetings.
This summit was more effective than the previous nineteen, which were all quite disappointing. Some useful measures were successfully implemented. The agreements of greater impact were those referring to bank bailouts and the purchase of sovereign bonds. The first allows bailout funds of the Euro Zone to directly recapitalize banks in stead of having the European Central Bank or the ESM provide the funds through governments which, therefore, guarantees them and increases their foreign debt. The second agreement allows the ESM to purchase sovereign bonds in the market. Both measures are important since they dissociate efforts to relieve the banking crisis from those aimed to mitigate the effects of the sovereign debt crisis that made indebtedness in the capital market unviable. An example was that the Spanish banking bailout with State guarantee only exacerbated markets’ distrust regarding the allocation of sovereign bonds. To make things worse, the bailout was approved granting the category of ‘superior’ to the new generated debt, meaning of privileged collection before an entirely different debt acquired by the Spanish government.
Another transcendental measure was precisely the agreement on not to consider bailout funds as ‘superior’ to the existing loans. However, the application of this decision was limited to the adoption of a role of single and central Banking Supervisor by the ECB over the entire European banking system: 800 supranational, regional and national entities. Which means, in the Spanish example we have been analyzing, that the banking bailout funds would keep being guaranteed by the State until it is convened statutorily and then after it was approved to grant the ECB with functions of central supervisor. While the panic with which investors received the decision to rescue banks a few days ago decreased, if the institutional and statutory adaptation the ECB must carry out is delayed, panic may reemerge. This adaptation would constitute a very important step towards the most important aim which is to form the Full Banking Union, that will require much greater fiscal backing. Spaniards and Italians still do not believe a Euro housed in a Berlin bank is worth the same as a Euro housed in a bank in Milan or Madrid, mostly because insolvency and the risk of bankruptcy still persist.
In the short term, it was Spain the immediate beneficiary of the Summit, since the 100 billion Euros approved for the banking bailout are not bound to government guarantee. With the Euro Cup, the arrival of the summer and the visitor record, for a few months it went from being the ‘semi Greece’ to breathing with certain relief within the economic and social hell it has had to endure for these past few months.
Apart from the aforementioned measures, the Brussels Summit passed a ‘growth plan’ promoted by the French President Hollande for the amount of 120 billion Euros destined to finance projects of infrastructure, alternative energies and productivity enhancement. The use of these resources, which would be managed by the European Investment Bank, will prioritize assisting countries whose economies have been affected by the crisis. I believe the resources assigned to this ‘growth plan’ are scarce, not correlated with the depth of the economic crisis, barely over the resources requested by a single country to rescue its financial system and do not match even a quarter of budgetary or banking bailout plans for Greece, Portugal, Ireland and Spain combined. It rather appears to be concessions to Hollande’s claims, since most of those resources are not fresh funds but funds that are redirected from other destinations. The fall in the interest rate announced by the ECB seeks to adhere to this plan as an instrument of investment and growth reactivation.
Actually, what was most important is what was part of the agenda prepared by the Commission and was not reviewed. The list includes an increase in funds assigned to the ESM which came into force as of July, with a ceiling of 500 billion Euros; a deposit guarantee or a banking resolution regime for the entire Euro Zone; and the Eurobonds that did not appear on the menu but over which lied great expectation. It is unquestionable that the Euro Zone is yet far from solving deposit guarantees and transforming debt into mutual, the true criteria with which Merkel’s so requested move towards Banking and Politic Union as a definitive solution to the crisis can be measured. And the dimension of that distance will determine Europe’s performance in the second semester of the year and, consequently, markets’ reaction.
The adopted measures, an outcome of uncountable previous meetings, are important because they destroyed the mutually destructive bond between banking crisis and sovereign debt crisis, but they were timid and curtailed. The Euro is still vulnerable to speculative movements with ESM’s fire power limited while the ECB is unwilling to assume that role. That power should be much greater, even infinite, as Krugman states, in order to act as a true firewall to an eventual attack, a scenario that makes investors panic. Let us bear in mind that Spain and Italy’s pending debt is close to 2.8 trillion Euros, nearly six times the ESM. Likewise, the ‘growth plan’ is a tad illusory, since it represents little over 1% of the Euro Zone’s GDP and the possibility of buying sovereign bonds in the market is limited.
In conclusion, necessary steps were taken with a better orientation but limited as to being able to meet the three necessary conditions to stabilize Europe: definitive separation between banks and sovereignties; financing the weakest countries in manageable terms and throughout an extensive period of economic adjustment; Euro’s defense before eventual speculative attacks and above all, returning to a healthy growth.
There was progress towards a greater degree of integration, with a coalition formed by France, Spain and Italy which altered the political dynamic of the Euro Zone. Germany softened its orthodox perspectives so it would not be isolated, which further down the road may enable setting off larger transformations that will improve Europe’s integration, such as: making the Banking Union a reality in this year, enhancing the ESM’s fire power, the ECB emitting Eurobonds and that ‘growth plan’ funds may be significant enough to face the stagnation several European countries are going through. The question remains: Will those changes arrive in time to definitely stabilize the old continent and to stop threatening global economy?
