|Did Merkel smile?|
|Monday, 02 July 2012 00:00|
All evidence suggests EU crisis far from resolved
Though the media has declared the EU summit an unqualified success, it’s a good idea to see what bond/currency markets have to say over the next few days. While German chancellor Angela Merkel has agreed to allow eurozone bailout funds to directly buy bonds of crisis-hit banks of countries like Spain, this is contingent upon the creation of a single banking supervisor, the deadline for which is the end of the year. Also, the bailout funds, to mention just one part of the reality-check, have nowhere near the funds required to bail out banks in Spain or Italy.
Getting Merkel to being more flexible was a coup, but some part of this may have to do with Germany not wanting to look like the bad guy all the time. Indeed, a large part of Germany’s demands remain intact. A single banking supervisor means European nations will have to be willing to give up on their sovereignty. And none of this is going to happen –as the debt of the banking system is higher than that of the governments in most cases, this is going to be quite costly – unless there are concessions made on a closer fiscal policy. For now, it would be more useful if the ECB cut its policy rates. It may also be useful to ponder over the idea – proposed by two academics – and popularised by Reuters Breakingviews Editor Hugo Dixon – that core eurozone nations subsidise interest rates in the periphery, reducing the need for the eurozone’s permanent bailout fund buying bonds. Under the scheme, if the interest in Spain is 6.8% to Germany’s 1.5%, the eurozone nations will pay Spain enough to make the effective interest cost on its loans 1.5% -- once Spain’s effective costs fall and it begins to grow, the costs of fresh borrowing would reduce; Dixon says the scheme cost 50 bn euro. Small change compared to the possibility of the euro breaking up and even the other schemes planned.