Did the Brussels summit achieve anything useful?
The Brussels announcement isn’t so much unravelling, says Michael Wilson. Rather, as the dust settles, the sheer enormity of the European banking project is coming into painful focus:
So did they or didn’t they? Were the papers right to report, after the 29th June summit, that Angela Merkel had finally cracked and given way on the subject of indemnifying Europe’s over-exposed banks, instead of funnelling all the eurozone rescue money straight through to national governments as the German Chancellor had always tried to insist? And did Europe’s leaders really agree to let the European Central Bank lord it over Eurozone banks in a key supervisory capacity? (Or, heaven forbid, over ours as well?) And did the Euro summit really undertake to support the government bond debts of Spain and Italy in a way that would take a lot of the strain off their embattled banks?
You’d have thought we’d have been sure of our facts by now, a full week and a half after the historic rescue agreement was launched. Somebody, somewhere, must have put finger to keyboard and spelt it out all in words of one syllable. But you’d have been wrong. What we’ve got instead is the horrible nagging worry that Europe’s leaders have taken a cue from successive British Budget speeches – namely, by making the headline-grabbing statements first and then going away to find out whether or not they can actually be made to work.
Truth or Dare
Whatever it is that Europe thinks it’s signed, the markets clearly don’t agree. As the bond markets opened this week, Spain’s ten-year yield was heading back toward 7%, and Italy’s rates were actually above the levels that had prevailed on the eve of the summit. The FTSE Eurofirst 300, which leapt by a joyful 5% jump on the Brussels announcements has now lost 60% of its gains and is back to the pitiful volume levels of last December.
The FT’s permanent Euro-bear Wolfgang Münchau isn’t known for mincing his words, and he wasn’t sparing anybody’s sensibilities yesterday with his prediction that neither Italy nor Spain would be able to stay in the euro club, and that their leaders really ought to have told Frau Merkel that they were planning an orderly withdrawal unless Brussels policy is changed abruptly. Which seems especially daunting, since (as his name suggests) he has a firm Teutonic grasp of the ways that Frau Merkel thinks. But actually his reservations, and mine too, are based on something more fundamental.
A Long Term Project
Namely, that the Brussels summit’s ambitious plan to recapitalise the eurozone’s banks by putting them all under the ECB’s supervision will take years and years and years to implement. To restructure an entire industry will require treaty changes, constitutional changes, vast changes to national regulations and much more. It would, said Mr Münchau, be the biggest European integration exercise in history. It’s a full banking union, nothing less.
Until all that has been achieved, the prospect of a jointly funded bailout and stabilisation package backed by the ECB will remain pie in the sky. Brussels says it has allocated €100 billion or so of money to the task, and that these can be leveraged up to achieve a massively bigger restructuring fund. But who’s got the licence to undertake this leveraging? Not the ECB, that’s for sure. When will it get it? When the banking union’s in place, and not before.
Don’t get me wrong on this point. It’s great to see Europe’s politicians standing up at last to their responsibilities. And it’s arguable that the banking reform they’re proposing is the only available course. There is real progress being achieved here, and it’s good to see. But if you’re a canny bond trader (and most of them are), it also looks as though the timetabled process for getting Europe straight is going to be a damn sight longer, and a damn sight more fraught, than the easy headlines of a week ago might have suggested.
Tags: angela merkel | bond debts | bond markets | brussels summit | budget speeches | cue | european banking | eve | FTSE | german chancellor | government bond | keyboard | michael wilson | national governments | nbsp | sheer enormity | supervisory capacity | syllable | volume levels | wolfgang münchau