I’m not heartened by last week’s agreement among Eurozone countries to commit to stricter austerity packages. At best, things are going to get really, really messy as countries continue to cut budgets, as growth slows, as a variety of treaties have to be hammered out, as unemployment and social unrest increases.
And last week’s agreement wasn’t substantive enough to eliminate the risk of continued financial shocks that could literally lead to several sovereign defaults and the collapse of the euro.
Sure, maybe Britain will get on board with a broader treaty among the entire European Union (a larger group than the Eurozone). Maybe the European Central Bank will after all decide to play the role of lender of last resort and to make purchases to prop up the bond markets of some countries. Maybe there will be a few upside surprises somewhere, but I don’t know what those could be.
But in the absence of a stronger policy response, the entire financial system of Europe could come crashing down.
A few links of interest for those who’ve been following this:
The gap between summit rhetoric and reality, from the Financial Times’ Alphaville:
The fiscal compact has some worthy long-term goals but wonâ€™t in itself be able to solve the eurozoneâ€™s balance of payments problems, and it also introduces a new round of political risk into the first half of 2012. Itâ€™s also unclear whether the European Commission has the requisite authority to provide institutional support to the compact â€” though Brussels remains supremely gifted at legal pragmatism, if nothing else.
In short, itâ€™s unclear whether (1) the deal has enough power to change statesâ€™ behaviour (a problem worsened by the fact itâ€™ll take time that the eurozone doesnâ€™t have to show how the rules work), and (2) it can escape unscathed from the small country electoral gauntlet itâ€™s about to run.
From Reuters’ Slowdown arrives and credit tightens:
EU leaders agreed last week on deeper economic and fiscal union for euro zone members, but uncertainty is rampant over whether Europe has constructed firewalls strong enough to prevent further bond market sell-offs. Neither the European Central Bank, the European bailout fund nor the International Monetary Fund have sufficient resources to backstop the euro zone.
Analysts warn this leaves the global economy exposed to further financial turmoil in the weeks and months ahead. Already, emerging markets are facing a credit squeeze as Europe’s banks sell assets and bring money back home to strengthen their balance sheets. This looks set to worsen after the European Banking Authority last week said the region’s banks must raise 115 billion euros in extra capital.
Paul Krugman fears that the economic turmoil in Europe could result in fundamental challenges to democracy.
And from the WSJ’s Investors Brace for Bank Verdict on EU Plan, a sense of the areas of most immediate attention in the coming days:
European governments and investors await Monday a verdict on the summit accord hammered out late last week from the one institution they believe can halt the euro zone’s downward debt spiral: the European Central Bank.
In an agreement finalized early Friday, the 17 euro-zone governments and potentially others in the 27-nation European Union agreed to a greater centralization of their budgets and automatic punishment for budget busters.
Financial markets showed a muted response to the summit Friday. Many investors cautioned that while progress had been made, the region’s crisis was far from resolved. “There’s been progress, but this is not enough to constitute a satisfactory resolution” of the debt crisis, said John Lonski, chief economist for Moody’s Analytics’ Capital Markets Research Group.