The European Council’s economic summit concluding on June 29, 2012 seemingly was a stellar success. First- and importantly given the modest (or low) expectations preceding the meetings, the rendezvous did not end in disastrous collapse. Players did not exit uttering unpleasant comments about or noisy threats toward their fellows.
Participants did not merely stress their desire to stabilize (protect) the European Monetary Union. Pacts, declarations, statements, and remarks by participants and politicians offered near-term support for the Spanish banking (sovereign debt) problem (though quite a few details remain).
Spanish banks will be recapitalized directly via the EFSF/ESM (the ESM stage assumes the ESM going into effect). Thus bailout money for this purpose will not go to the Spanish government, reducing Spain’s potential government indebtedness.
In addition, leaders made promises regarding European banking supervision. There also now are greater hopes for Europe-wide bank deposit insurance. Moreover, the extensive official statements related to budgets, fiscal union, and related matters were hopeful hymns to many enraptured audiences.
And no one can deny the sunny revival movements expressed via the sharp stock, interest rate, currency, and commodity forums following the conference.
However, a review of the lyrics in the documents issued by or directly related to this important European Council gathering shows that leaders made little progress in solving the underlying economic (fiscal, debt; structural, political) problems confronting Europe (and particularly the Eurozone). Thus widespread happiness regarding this summit probably will not persist. This money summit arguably makes more urgent appeals than prior ones. It does speak fondly of road maps, architecture, and building blocks. Talk of unified banking supervision and deposit insurance is some progress. However, as in other recent summits, fundamental problems are handled with vague language and nebulous standards. Issues of how to resolve such ambiguity thus permeate the documents. And binding mechanisms by which to effectively enforce current (and any future) fiscal standards for the various nations remain lacking.
The summit documents and related songs of confidence may buy politicians, central bankers, and other economic officials some time. However, the result is about the same as that from other recent European choruses- not much fundamental advance toward solving debt and leverage problems for Europe as a whole. It is way too soon to shout hallelujah. The persistence of the crisis (and especially further worsening of it) eventually may speed progress toward a solution.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Europe’s Happy Days (7-2-12)