Euro Zone Progress, but No End Game
Why is it that the euro zone’s leaders will only make a decision when they have their back to the wall?
Friday night’s deal in Brusselswas only made possible by sovereign downgrades and skyrocketing bond yields that still have the potential to push the periphery countries over the edge.
So what kind of a deal did we get? Well, to be honest it does represent progress of a sort. Greece is going to see its cost of borrowing reduced and the bailout fund will have some extra money and opportunities to use it. The issue is that this program will sadly not be enough to solve the region’s problems and prevent the inevitable defaults that are coming for Greece, Ireland, Portugal and probably others.
Indeed, the fact that the new program only helps Greece is symptomatic of the deep divides that still exist. Ireland and Portugal both need much more assistance if they are to keep their heads above water. Yet more and more austerity seems to remain the quid pro quo for this help being available.
Both countries are insolvent at present and need a combination of ultra-low rates and debt restructuring to chart a course back to growth. More cuts won’t help.
The fact that Lisbon may have announced that it will implement another round of austerity, is more to do with politics than economics. The prognosis for its economy remains bleak. The Socrates government seems to be putting its political survival ahead of the country’s best interests.
It knows that if the European Union and the International Monetary Fund are called in, then it is out. But if Socrates is hoping that the new fund will buy his country’s bonds in the primary market then he also knows that he will have accept a program of sovereignty sapping oversight. Such an outcome will amount to the same outcome so it’s hard to see how it will happen.
Ireland also still finds itself in a difficult position. But Kenny is right to resist calls for the country to raise its corporate tax ratein return for a reduced rate on the EU/IMF bailout package. He holds many more cards than the likes of Sarkozy gives him credit for. That’s because if Dublin takes the sensible course and forces senior bank bond holders to take a haircut then the ramifications will be huge for the whole of the European banking sector. Consequently, expect the line from Irelandto be tougher as we progress towards the end of the month.
In short, what we now got in Brussels was progress but not the end game.
The deal struck on Friday night is far from the finished article and while the markets now may give the region a bit more breathing room there is still much to be done before the formal summit on March 24-25.