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The EU Crisis from the Problem to the Solution (maybe) Part 2 of 2

Autore: FX Empire Analyst - Barry Norman

2012-07-02 20:45:00

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The EU Crisis from the Problem to the Solution (maybe) Part 2 of 2

The EU Crisis from the Problem to the Solution (maybe) Part 2 of 2

Prior Failures……

After 18 summits, the European leaders came up with short term and long term measures to stem the debt crisis of the Euro zone.  Series of earlier meetings till March 2012 of the European leaders had ended in a disappointment. The leaders of the group in the month of March 2012 signed a treaty for fiscal stability, coordination and governance of strict budgetary discipline was regarded as statements and did not laid down concrete steps in the short term. Meeting of European Union leaders on June 28th and 29th 2012 was crucial as the crisis in Greece to some extent was averted and gave thin margin hope when the Greece electorate voted for coalition government in favor of austerity measures and opined to stay in the European Union. The focus thereon shifted to Italy and Spain, the third and fourth largest economies of the region. The yield on Spanish 10-year bond was hovering around 6.5 percent up from 3.5 percent a year ago, and the market demand was 5.7 percent for 10-year Italian paper compared with 4.7 percent a year ago, both reflecting declining market confidence in government debt thereby yields becoming unsustainable at these levels. The major opposition was being seen by the German Chancellor who had openly rejected sharing of the debt until all EU nations comply with strict budgetary discipline.

The final Summit………

Thus, all global markets were eyeing this summit as the final answer to the lingering Euro debt crisis. On the other hand failure of the same would pose substantial challenges to the Euro zone nations.  Sentiments before the crucial June 28-29th 2012 Summit was although not encouraging.

However, leaders were able to strike a deal to help Spain and Italy to recapitalize Spain’s banks and to buy Italian sovereign bonds through the 500 billion euro zone’s rescue funds  thereby bringing down their spiraling borrowing costs. The ECB President regarded it as a major breakthrough.  The deal also witnessed the introduction of the European Stability Mechanism, the union’s future permanent bailout fund which would be able to directly recapitalize banks.

The Grand Plan… finally

The essence of recapitalizing banks directly and not to the government would avoid putting more debt on the government’s book and thereby discourage the investor’s to demand higher interest rates. The leaders also agreed upon the creation of a single supervisory body for the euro zone banks by the end of this year which is seen as a first step towards European banking union. Apart from the financial stability measures, it was also agreed to devote a package of €120 billion that would be utilized for growth promotion measures and for closer fiscal and economic cooperation. A positive reaction was thus seen by Mario Draghi, the European Central Bank President.  The European Financial Stability Facility would initially help in aid and thereafter European Stability Mechanism would take over when it comes into force next month (July 2012). France’s President Francois Hollande was the most optimistic as it saved the Union of 27 nations.

The measures adopted by the European Union would bring in re assurance in the markets all around and would help in to gain some stability in the markets and the world economy. As global markets are largely integrated the final verdict as to whether Greece would remain in the group due to soaring government debt, measures to aid other members of Euro zone and thereby boost the global economic sentiments was an essential decision to arrive at. On the backdrop successful meeting, the European Union leaders discussed on the long term plans for a common fiscal authority and banking union. In order to sustain the growth in European Union it is essential that both the kinds of unions form a concrete pillar towards greater integration of EU and the world markets. With concrete rescue plan on the road map of the Euro zone nations to resolve the sovereign debt crisis is likely to boost the growth of the entire group leading to relief to the entire economy.


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