Europe's Temporary Economic Relief (Portfolio)
Video Transcript:
Video Transcript
Stock markets rallied this week after EU leaders reached an unexpected degree of consensus following their latest summit. The announcement of the new crisis-fighting measures brought immediate relief for Spain and Italy's distressed bond markets. However, the bulk of the new proposals will not become operational for at least six months -- during which important technicalities will be negotiated. Political uncertainty still looms large, meaning Europe's respite could well be short-lived.
The latest raft of EU proposals is centered on the European Central Bank (ECB) becoming the top-banking supervisor of all eurozone banks. In this role, the ECB would assume greater control over the operations of eurozone banks -- fulfilling a condition that would then allow the eurozone's bailout mechanisms to lend directly to banks.The idea is that lending to banks directly won't increase a country's sovereign debt. This would then break the cycle of indebted states borrowing to bail out their banks.
Finally, EU leaders agreed to slightly soften the terms placed upon a country seeking bond market intervention from the bailout funds to ease their borrowing costs. Countries will still need to formally request support of the ESM and accept economic monitoring from Brussels but would no longer have to comply with a catalogue of conditions set by the IMF.
The media has hailed the outcomes of the summit as major victories for Spain and Italy and a disastrous defeat for German Chancellor Angela Merkel. However, this interpretation of events has little merit if you look closely at what was actually agreed upon. Germany is very much in favor of increasing the ECB's control over Eurozone banks.
While the IMF may not be involved in setting the terms for financial assistance should Spain or Italy require bailout funds to control their borrowing costs, such assistance will still come with conditions and economic monitoring. It may be less invasive than the IMF's programs, but countries are still faced with the unsavory prospect of having a third party involved in their finances.
The more concerning battling confronting Merkel and other European leaders is not concessions to Spain or Italy. It is convincing the domestic opposition at home.
As the crisis in Europe has deepened, EU leaders have been forced to speed up the bureaucratic decision-making process and as a result they are often discussing dramatic structural change to the EU without consulting national institutions. Parliaments, judiciary branches and voters across Europe are increasingly expressing their opposition to what they see as being effectively cut out of the democratic process.
Europe's political elite will be held increasingly accountable to domestic politics and national institutions, which will hinder future attempts for political and financial integration. The uncertainty created by referendums, parliamentary decision-making and supreme court rulings make it likely that Europe's relative calm won't last long.
