The Euro 2012 Financial Competition

The financial markets reacted positively to last Friday’s news from the Eurozone (EZ) summit meeting The bloc’s political leaders again were meeting to discuss strategies and procedures for resolving the continent’s sovereign debt problem. The news coming from the meeting indicated that there were significant developments. The political leaders had agreed to tackle the continent’s debt problems by encouraging and stimulating growth of member nation’s economies. Apparently Germany had ceded some ground on it stance that austerity measures had to be implemented to resolve the continent’s debt problems. The details of the agreement must be worked out along with implementation procedures. From what I have read the leaders also agreed to make it easier for economically challenged governments to use bailout funds to buy their bonds. This understanding would make it easier for the governments to raise money while postponing a real solution to the problem of no private investor interest in the purchase of European sovereign debt.  Across the Atlantic the primary Wall Street indexes all closed higher on the news a European agreement. The NASDAQ gained the most by climbing 12.66%.

Upon the conclusion of past summits the markets have always surged slightly higher. Still, the commentators are suggesting that this summit has produced a game-changing consensus that might finally allow the EZ to right its financial ship. A joint statement issued by the negotiating leaders made it clear that they wanted to “break the vicious circle between banks and sovereigns.” I believe that the Friday’s meeting produced a political agreement that was driven by member nations’ domestic considerations. The debate and negotiations over building a strong financial union without the necessity for constantly rescuing the weaker economies was deferred for yet another summit. The agreement appears to address the political considerations at the cost of dealing with the bloc’s financial problems.

England does not use the euro. It is not a member of the EZ though it is a principal member of the European Union. British Prime Minister, David Cameron, who is often at odds many of the EZ political leaders, praised the agreement as a big step forward. He believed that the agreement to allow European bail-out funds to directly support banks in crisis-hit countries was the right move. PM Cameron also acknowledged the significance of relaxing some of he conditions for Spain’s receipt of monetary assistance from the fund. It is very likely that Spain, provided that certain conditions are met, will receive bailout funds deposited directly with designated banks. As clear concession to demands made by Italy, nations that want the EZ bailout fund to purchase their bonds will not longer have to be subjected to Greek-style monitoring programs.

The new crisis-fighting measures seem to be designed at assuaging domestic nationalistic concerns while preserving the bloc’s unity. It seems to me that the agreement pulls the EZ in the wrong financial direction.

The Financial Times ran an informative evaluation of the agreement in its June 29, 2011 edition, entitled “One Small Step for European Mankind.” The article discussed whether the European Council could forge a political agreement to use its policy tools to stabilize the EZ financial markets. It is conceded that the deal is subject to further interpretation and negotiations. According to the article the leaders made an effort to tie inextricably tie their fates together. At least for the moment, according to the article, the EZ’s demise has become more remote. What the members agreed to was a moving of the bloc towards a true euro banking union. The member states will give the European Central Bank power over their banks, which in return can be recapitalized directly by the EZ’s rescue fund. Will the banking industries of the member nations really cede power over the operations to a foreign entity?

There are concrete financial benefits to be derived from EZ’s tentative new agreement, as well as risks of sliding down into a dark financial and legal abyss. Obviously the economically challenged economies would love to have their banks recapitalized with fresh funds. These banks do not have access to private bond markets, their bonds being deemed to risky to buy. It is generally agreed that these troubled banks fell upon hard times because they were “required” to buy its nation’s toxic foreign debt. The agreement does not address the crucial question of how to attract private investors to purchase sovereign debt. We should not overlook the fundamental rule that investors invest to make money and not to be forced to take “haircuts.” Because individual nations of the EZ cannot devalue their respective currencies they must impose growth-sapping economic measures to regain competitiveness. This is the paradox that drives the European debt crises. In his article in the June 29, 2012 New York Times business section on private bond buyers, Landon Thomas Jr. concludes that “…Friday’s euphoria notwithstanding, economists and market participants remain doubtful that bond market fears can be permanently assuaged until the European Central Bank intervenes with the force and conviction shown by its peers in the United States and Britain…” The real question that must be addressed is can the bloc overcome strong nationalistic considerations to raise the necessary funds to forcefully stabilize the continent’s bond markets.

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