The EU’s 22nd summit broke new ground; it proved beyond doubt that turkeys can vote for Christmas if the turkeys are European politicians.
At the summit, the Germans gave ground on the early implementation of the SSM (Single Supervisory Mechanism) for eurozone banks. But the eurozone periphery retreated on a range of issues. They failed to get agreement on euro bailouts for their banks without taking the liability on to government books (at least until the new banking union is in place). And they failed to get any retroactive revisions of previous bank bailouts (Ireland).
What this means is that there is more delay in sorting out the euro debt crisis. Spain is going to hold back on asking for a euro bailout until German chancellor Angela Merkel is ready to go to the Bundestag for approval of a bumper package (bailouts for Spain and Cyprus and a new package for Greece). Spain is hoping that this can be delayed until the new banking mechanism is in place and then it can get direct euro funding for its banks without recourse to the Spanish government. Until then, the European Central Bank’s lovely, new, shiny eurozone bond purchasing programme (Outright Monetary Transactions) will remain in the garage.
Europe’s politicians continue to procrastinate for various reasons. First, Germany is entering an electoral period that will make further concessions to the distressed eurozone states more difficult. So Merkel wants to line up a one-shot approval of all upcoming packages through the Bundestag rather than a series of piecemeal dramas.
Second, the Greeks have not agreed yet to details of the €11.5 billion in cuts that they have to make to satisfy the Troika that they are back on track with fiscal targets. Even if there is agreement, Merkel cannot ask the Bundestag for another bailout for Greece. Some clever wheeze will have to be found to get the Greeks some more money in order to extend their austerity programme by another 18 months. The Greeks claim that they will run out of money by the end of this month.
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Third, the Spanish 2013 budget does tighten fiscal policy by a further 1.4% of GDP (0.8% in spending cuts and 0.6% in increased taxes). But it is way too optimistic on growth and in meeting the target this year. It will have to fudge the outcome by using pension reserves. And the official Spanish bank stress test report released last month underestimates the projected cumulative losses for Spain’s banks from the real estate bust and the ensuing economic recession. The EU is providing sufficient funding to achieve bank recapitalization and clear up the property market over time.
However, there will be a big hit to the Spanish budget and debt levels. Financial markets will not take the pressure off Spanish government bond yields until Spain applies for a full bailout package from the EU. So Spain cannot avoid asking for funding – it just wants to delay as long as possible so that prime minister Mariano Rajoy can avoid any further austerity measures that will lose him further political support domestically.
And as there will be no substantial movement on EU-wide banking regulation until after Christmas, that means any further concessions or revisions to existing bailout programmes for Portugal and Ireland will have to wait until 2013.
Eurozone politicians are all playing the domestic game again and missing the great opportunity offered by ECB president Mario Draghi to nail a substantial part of the crisis. Once again, the politicians have proven their flawless mediocrity by delaying things.
Fortunately, Europe is not the world and there are other places to think about. Some growth is coming back into the global system – China and the US being examples. And after probable elections before Christmas, a new Liberal Democrat government in Japan will weaken the yen, possibly through moving to a Swiss-style peg with a one-off devaluation. Once the US presidential election is out of the way, the US Congress should come up with a compromise to deal with the fiscal cliff rising before the New Year.
That suggests that, despite the euro crisis delays, the financial world might look better in 2013.