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Court puts eurozone on the road to recovery
Source: Agencies |
September 14, 2012, Friday
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Print Edition
Print Edition
EUROPE has cleared more obstacles on the road to containing its sovereign debt crisis and stabilizing the eurozone after Germany's constitutional court allowed a permanent bailout fund to go ahead and the Dutch voted for pro-European parties.
Coupled with a European Central Bank decision to buy short-term bonds of states that apply for assistance and abide by strict conditions, and with EU proposals for a single eurozone banking supervisor, the court ruling clears the way for a concerted effort to draw a line under the crisis.
However, Europe has yet to find a strategy to revive economic growth that would enable highly indebted states to reduce debt and create jobs.
Austerity program
Ireland is inching its way back towards the capital markets and Portugal is implementing a tough austerity program.
Greece remains an exception to the mood of cautious optimism, but talk of forcing Athens from the eurozone has abated.
"If you look at the ongoing few weeks, I would say we see a light at the end of the tunnel," Finnish Europe Minister Alexander Stubb said.
Enthusiastic market reaction after the German ruling, with Spanish and Italian bonds rallying, shares rising and the euro hitting a four-month high, showed many investors believe the eurozone is starting to get on top of the crisis.
The next hurdle is Spain. Prime Minister Mariano Rajoy is under pressure to apply for a limited assistance program that would allow the rescue fund to buy Spanish bonds upon issue, and the ECB to intervene to bring down shorter-term borrowing costs, while keeping Spain in capital markets.
Rajoy said he was considering requesting ECB support and would not object to IMF involvement in monitoring Madrid's public finances.
Whether for tactical reasons, out of national pride or fear of the political consequences, he is holding back on an application, possibly hoping he can get past October 21 regional elections and a late-October funding hump without outside aid.
Rajoy is resisting German pressure for tougher additional policy conditions to be attached to any aid program, refusing to consider cutting pensions, a key drag on Spanish finances. If Spain tries to tough it out, its risk premium over safe-haven German bonds could spike again as investors take fright.
With the ECB effectively declaring itself a buyer of last resort for troubled governments' debt, predictions of a eurozone breakup have become less imminent.
The prophets of doom are now to be found more among the guardians of German central banking orthodoxy than among Anglo-Saxon critics of the single currency.
"We will get a liability union which will change the character of the monetary union towards an Italian-style monetary union. It will have parallels with the Italy of the 1970s and 1980s," said Joerg Kraemer, chief economist at Commerzbank.
Criticism echoed
The Bundesbank, Germany's central bank, was isolated in opposing the ECB bond-buying decision, and its criticism was widely echoed in the German media.
Yet one of the lessons of the last week is that strident critics have failed to sway either Chancellor Angela Merkel or the constitutional court judges.
Indeed, the pro-European consensus in Berlin's political establishment seems to be strengthening.
The opposition Social Democrats and Greens support closer EU fiscal and economic union, including the eventual issuance of common eurozone bonds, giving Merkel potential alternative coalition partners after next year's German general election.
That may have emboldened usually cautious European Commission President Jose Manuel Barroso to call in his State of the Union address for a more far-reaching pooling of sovereignty to move towards a "democratic federation of nation states."
Yet there is little public appetite for deeper political integration in many countries.
Other obstacles to a smooth resolution of the crisis include Greece's failure to meet its fiscal and economic reform targets and financial troubles among eurozone minnows Cyprus and Slovenia.
Economists are also worried that France, a crucial contributor to the rescue fund, is failing to cut public spending or embark on structural economic reforms under way elsewhere in the eurozone.
Uncertainty shrouds Italy's prospects. Technocratic Prime Minister Mario Monti's term expires next April and a general election may produce political gridlock or a weak government.
It is also unclear whether ECB support for Spain, assuming it requests assistance, will be enough to keep Italy's borrowing costs under control without Rome having to apply for a program of its own.
"The euro crisis is not over yet. It comes in waves. Grave risks are still ahead," said Holger Schmieding, chief economist at Berenberg Bank.
"But between them, the German government, the German court and the ECB have over the last six weeks made it even more likely than before that future waves of turmoil will be less vicious than the ones before."
Coupled with a European Central Bank decision to buy short-term bonds of states that apply for assistance and abide by strict conditions, and with EU proposals for a single eurozone banking supervisor, the court ruling clears the way for a concerted effort to draw a line under the crisis.
However, Europe has yet to find a strategy to revive economic growth that would enable highly indebted states to reduce debt and create jobs.
Austerity program
Ireland is inching its way back towards the capital markets and Portugal is implementing a tough austerity program.
Greece remains an exception to the mood of cautious optimism, but talk of forcing Athens from the eurozone has abated.
"If you look at the ongoing few weeks, I would say we see a light at the end of the tunnel," Finnish Europe Minister Alexander Stubb said.
Enthusiastic market reaction after the German ruling, with Spanish and Italian bonds rallying, shares rising and the euro hitting a four-month high, showed many investors believe the eurozone is starting to get on top of the crisis.
The next hurdle is Spain. Prime Minister Mariano Rajoy is under pressure to apply for a limited assistance program that would allow the rescue fund to buy Spanish bonds upon issue, and the ECB to intervene to bring down shorter-term borrowing costs, while keeping Spain in capital markets.
Rajoy said he was considering requesting ECB support and would not object to IMF involvement in monitoring Madrid's public finances.
Whether for tactical reasons, out of national pride or fear of the political consequences, he is holding back on an application, possibly hoping he can get past October 21 regional elections and a late-October funding hump without outside aid.
Rajoy is resisting German pressure for tougher additional policy conditions to be attached to any aid program, refusing to consider cutting pensions, a key drag on Spanish finances. If Spain tries to tough it out, its risk premium over safe-haven German bonds could spike again as investors take fright.
With the ECB effectively declaring itself a buyer of last resort for troubled governments' debt, predictions of a eurozone breakup have become less imminent.
The prophets of doom are now to be found more among the guardians of German central banking orthodoxy than among Anglo-Saxon critics of the single currency.
"We will get a liability union which will change the character of the monetary union towards an Italian-style monetary union. It will have parallels with the Italy of the 1970s and 1980s," said Joerg Kraemer, chief economist at Commerzbank.
Criticism echoed
The Bundesbank, Germany's central bank, was isolated in opposing the ECB bond-buying decision, and its criticism was widely echoed in the German media.
Yet one of the lessons of the last week is that strident critics have failed to sway either Chancellor Angela Merkel or the constitutional court judges.
Indeed, the pro-European consensus in Berlin's political establishment seems to be strengthening.
The opposition Social Democrats and Greens support closer EU fiscal and economic union, including the eventual issuance of common eurozone bonds, giving Merkel potential alternative coalition partners after next year's German general election.
That may have emboldened usually cautious European Commission President Jose Manuel Barroso to call in his State of the Union address for a more far-reaching pooling of sovereignty to move towards a "democratic federation of nation states."
Yet there is little public appetite for deeper political integration in many countries.
Other obstacles to a smooth resolution of the crisis include Greece's failure to meet its fiscal and economic reform targets and financial troubles among eurozone minnows Cyprus and Slovenia.
Economists are also worried that France, a crucial contributor to the rescue fund, is failing to cut public spending or embark on structural economic reforms under way elsewhere in the eurozone.
Uncertainty shrouds Italy's prospects. Technocratic Prime Minister Mario Monti's term expires next April and a general election may produce political gridlock or a weak government.
It is also unclear whether ECB support for Spain, assuming it requests assistance, will be enough to keep Italy's borrowing costs under control without Rome having to apply for a program of its own.
"The euro crisis is not over yet. It comes in waves. Grave risks are still ahead," said Holger Schmieding, chief economist at Berenberg Bank.
"But between them, the German government, the German court and the ECB have over the last six weeks made it even more likely than before that future waves of turmoil will be less vicious than the ones before."
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