Tuesday, September 18, 2012

Enjoying the silence

It was the week of relief. The German Constitutional Court’s ruling on the ESM and the Dutch elections were a blow to eurosceptics, pushing EMU break-up speculations away and leading to positive reactions on financial markets. The meeting of Eurozone finance ministers in Cyprus and yesterday’s comments by German chancellor Merkel, however, showed that several important issues still remain unsolved.

In the short term, Spain and Greece should get the most attention. Many market participants expect Spain to be the next one in line to ask for a bailout, even if it is a bailout light, and consequently be the first country to fall under the ECB’s new OMT programme. So far, however, no decision has been taken and it increasingly looks as if nothing will happen before the ESM has become operational (expected date 8 October) and the regional elections in Spain (21 October). By then, the Troika should finally have presented its report on Greece. There seems to be a growing consensus among Eurozone policymakers to give Greece more time as long as it does not cost more money. Whether this is feasible or pure magic remains to be seen. Yesterday, German chancellor Merkel again put forth her hand to Greece, stressing that she wanted Greece to stay in the Eurozone and that Germany was ready to help. It is up to Greece to grab the hand.

Unsolved short-term issues are not the only unfinished business in the Eurozone. The biggest work in progress – steps towards further integration – also proves to be more cumbersome and difficult than some euro-optimists might have thought. The first building block towards further integration, a banking union, was presented last week, but so far all Eurozone member states only embrace the principle of Eurozone bank supervision but largely disagree on the details. Over the last couple of days, the German government has tried to slow down the pace of a fully-fledged Eurozone bank supervision. Given the strict German opposition, a joint Eurozone deposit insurance scheme has more or less been postponed until a very distant future. More generally speaking, the longer the negotiations on the entire building blocks for a “genuine economic and monetary union” will last, the more difficult it could be to get Germany on board. Why? It will be election time in Germany next year.

The latest events have bought more time for the Eurozone. However, neither the ECB’s announced OMT programme, nor the German Court’s ruling on the ESM nor the Dutch elections have improved the fundamental situation of Eurozone economies. Spanish unemployment remains high, Italy and France still suffer from a lack of competitiveness and Greek debt has not become any more sustainable. Moreover, the roadmap towards further Eurozone integration remains a bit vague and there are obviously still diverging views. In sum, still a lot of unfinished work. It would be a false conclusion to think that the Eurozone has suddenly become a hunky dory country in which they play Depeche Mode all day long.

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