I thought I would provide some updates on Europe given that the response to the current turmoil is moving quite quickly, and there have been some major announcements since I wrote my previous post late last night.
Firstly we saw a statement from some EU leaders re-iterating …. well, everything.
President Sarkozy and Chancellor Merkel reiterate their commitment to fully implement the decisions taken by the heads of state and government of the euro area and the EU institutions on July 21st 2011.
In particular, they stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries. They welcome the recent measures announced by Italy and Spain with regard to faster fiscal consolidation and improved competitiveness. Especially the Italian authorities’ goal to achieve a balanced budget a year earlier than previously envisaged is of fundamental importance. They stress that complete and speedy implementation of the announced measures is key to restore market confidence.
As decided on July 21st, the effectiveness of the EFSF will be improved and its flexibility increased linked to appropriate conditionality, in particular through the following instruments: precautionary program, finance recapitalization of financial institutions and to intervene in secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the member states, in order to avoid contagion.
Basically this is a statement that clears the way for the ECB to start doing the job that EU parliaments can’t do themselves until the EFSF passes through their parliaments. I note the absence of a number of nations from the statement, which is a little worrying given that there are some that were extremely vocal about their position on Greece during the last bailout and still have the power to veto the entire deal.
The statement also contains the caveat that Italy and Spain are going to implement stricter austerity in order to satisfy some of the unsupportive parliaments of Europe. As my readers would know I consider this “austerity before competitiveness” approach to be economic suicide and I have no doubt that both countries have just agreed to make their economies far worse.
After that “hospital pass” to the ECB it really wasn’t a surprise to see the following announcement from Trichet. It isn’t like he had a choice in the matter.
1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.
2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.
3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.
4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.
5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.
6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.
So we now have another “can kick” in Europe. The ECB will now backstop Italy and Spain until the EFSF is available to take over. RBS are currently estimating the bill for Italy and Spain will be an additional €850bn. The austerity programs agreed to under these arrangements are guaranteed to make the debt positions of the recipient nations worse, and once again we see absolutely no effort to address the actual issue of disparity of competitiveness across Europe.
Given that the ECB is now the only line of defence between the market and a collapse of Europe until the EFSF comes online my expectations are that the market will now attempt to test its weaknesses, as it did Spain and Italy. Any news that the resolve of the Euro-elite is faltering on implementing an expanded EFSF program will be punished and instantly send Europe back into crisis meetings.
From what I can see the Europeans are being jawboned into a full fiscal and monetary union whether they like it or not. I will be watching with interest what happens after a few months when it is “surprisingly” reported that Italy and Spain’s economies are shrinking faster than earlier predicted.