European Central Bank | paulhunterjones

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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This past week German Chancellor Angela Merkel received some good news in her battle to save the EZ. The German Federal Constitutional Court , a highly respected institution in Germany, ruled in favor of the chancellor’s power and right to take part in bailouts of debt ridden EZ members. An interest group who opposed the bailout of Greece filed the case that was decided. The Court’s ruling did not give the Chancellor a complete victory. The Court held that the Chancellor had to seek the Bundestag’s (legislature’s) approval for any future bailouts. Still, Chancellor Merkel hailed the decision as an endorsement of her policy to use German resources to save the Euro. I disagree with the Chancellor’s interpretation of the Court’s decision. The German head of state must understand that the Court issued a legal ruling and not a political statement supporting the bailouts. The decision does not address the merits of the Chancellor’s decisions, policies or actions relative to the bailouts. Unfortunately, the Chancellor’s political fortunes are tied to the success or failure of the already issued bailouts. I doubt that there will be any more large bailouts in the future.

The week’s bad news for Chancellor Merkel was that Greece had not yet taken any affirmative steps to carry out the agreed upon austerity measures. Greece’s failure to follow EZ indicts hastens the demise of the financial organization.

In a earlier posting I argued against a financial bailout of Greece’s economy. In a later post I warned that continued financial help to Greece would lead to the collapse of the EZ. I did not understand the logic behind promising to lend more money to Greece before it took any real steps to implement the required austerity measures. In the past Greece had failed to carry out agreed upon austerity measures. Why would the EZ leaders think that this time Greece would (or could) start to organize its finances? I posed the simply question; what would the EZ do if Greece failed to carry out (again) the austerity measures? I think that Chancellor Merkel has to now face her worst nightmare and consider the possibility of this eventuality.

This week EZ leaders expressed their dismay with the lack of progress Greece had made in implementing the austerity measures. Evangelos Venizelos, Greece’s finance minister, defended his government’s efforts to comply with the EZ’s budgetary package. He asserted that Greece’s relationship with the troika, experts and monitors from the EU, IMF and ECB, were on an even keel. Yet, it is widely known that the troika suspended its latest monitoring mission to Greece. It is believe that the leaders of these groups are frustrated by Greece’s foot dragging and excuses. Now Greece seeks to delay the implementation of many of the agreed upon reforms. Experts are now predicting that Greece will miss its deficit target unless it immediately slashes spending.

Peter Spiegal, Brussels Bureau Chief of the Financial Times, recounts his conversations about Greece with attendees at this year’s Ambrosetti conference. The workshops and forums were held in Northern Italy from September 2 2001 and concluding on September 4, 2011. Mr. Spiegal expressed surprise that many attendees were willing to discuss the possibility that Greece might not continue as a member in the EZ. He stated in the interview that many of the attendees now believe that it might be necessary to force Greece out. The Brussels Chief said that six months ago many people would not have considered this a possibility. You can see the video of Mr. Spiegal’s interview on his conversations with attendees at the Ambrosetti conference.

In another related development the chief of the International Monetary Fund, Christine Lagard, urged policy makers of the Group of 7 to take bold and joint action to curb the global economy crisis. She set the stage for the finance ministers’ meeting in France. Ms. Lagard correctly described the world as “collectively suffering from a crisis of confidence in the face of a deteriorating economic outlook.” The IMF chief specifically alluded to the EZ countries that had already received EU and IMF rescues. Ms. Lagarde said publically what most leaders and experts are privately saying; Ireland, Portugal and Greece shoulder the burden of meeting their deficit targets. Her subtle though firm message was that these countries would not receive any further financial help.

Against the back drop that Greece was not implementing the austerity measures, the G-7 finance ministers and central bank governors met in Marseilles France. Their two-day meeting did not produce a joint strategy for jump starting their stalled economies. Actually the meeting failed to produce any tangible or meaningful results. Just like the EZ the G-7 consists of nations that have divergent sovereign interests that prevent unity of purpose and action. The G-7 meeting concluded on a note of resignation and unfulfilled promises.

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