European Summit Debt Crisis Plans Mean The Greek Problem Remains
The Eurozone crisis calmed a little now that the European summit has agreed on a plan, but for how many days, and what about Greece? The agreement reached in Brussels raised stock markets around the world but only because the deal exceeded expectations, and that’s only because expecations were already priced into the market and were as low as they could get.
European sovereign debt crisis plans will prove too little, too late
In the short term, pressure on Spain and Italy will be reduced, but not that much. The pain in the real economy will continue because the fundamental problem of too much debt only grows with more bailouts. Spain can unhitch itself from bank credit-rating problems because the sovereign debt deal allows Europe’s bailout funds to go directly to banks. Already, the change in Spanish bond yields was only slight as a result of today’s news.
The European debt crisis plan that was agreed upon at the summit is a move toward greater European banking and political unity on a long-term track. For now, it breaks the vicious cycle between banks and sovereigns. Under the old terms, money from those funds had to go directly to sovereign governments to be dispensed by the nation to the needy banks. This caused Spain’s credit ratings to drop because Spain became directly tied to the debts of failing banks.
The big catch to all of this is that all the leaders are still talking in terms of hope that this can be finalized by the end of the year! As we have seen with every European summit plan along the way, the problem will be so much worse than the present containment envisions that the solution will fall short by the time the deal becomes law. The time it will take to put the summit deal in place means the leaders of Europe are still chasing after a falling market. They are not getting ahead of the game. This is something they cannot avoid because the political structures of Europe require that the deal that has been worked out be approved by the European council and by the German parliament as it leans primarily on German money for the bailouts.
How the European debt crisis plan will unfold
It will not unfold as in “come about.” It will unfold as in “unravel,” for it still has many hurdles to face. In the very least, it will be far short of what is needed by the time it is in place. Markets will not wait for it to become law before they continue downgrading banks and nations. Money will continue to exit Europe. It only takes short-term memory to recall how markets soared, as they did today, with pervious Eurozone deals only to plunge a few days later as the deal fell apart or as the terms became better understood or as the crisis worsened to where the deal was obsolete before it even became law.
The details on the European sovereign debt crisis plan remain unclear. So, we’d better take a careful look under the hood here. One of the few known details easily throws a monkey wrench (or a spanner if you’re British) into the works. One of the conditions Angela Merkel won in her compromise was that the 500 billion euro European Stability Mechanism (ESM), which was due to come into being in July, cannot act until after a banking supervisory body is put in place. European Council President Herman van Rompuy hopes that this body will be approved by the end of the year. He is probably right that it will take that long, at best, because this change will have to be approved by the EU council, which means by all of Europe and not just the Eurozone members. It has other hurdles, too.
But the Eurozone doesn’t have until the end of the year, even though its leaders operate as if they have that much time. They operate as if time serves them.
A new problem is also created by the deal. As more liability is shifted toward Germany, the possibility of Germany seeing its credit ratings downgraded starts to rise. So, this deal could have the adverse affect of spreading the contagion right to Europe’s strongest organ. Germany has been Europe’s only safe haven for anyone wanting bonds issued in euros.
Therein lies another hurdle. This deal still has to be approved by German parliament, which could happen before my article is even finished, as it is scheduled for a vote today; but (and there is always a “but” when it comes to European summits) German politicians, including those in Angela Merkel’s government coalition, are calling for the German ratification vote to be delayed, saying too much has changed.
Said one critic in Merkel’s government,
The ink isn’t even dry [on the last agreement] and the substance of the ESM treaty is already being changed. (“Politicians Demand Delay in German Bailout Vote.”)
Even if the Eurozone deal clears the German parliament, it is expected to be taken to Germany’s highest court for legal review before it is signed into law by Germany. The high court has already made that request. That review will add further weeks to the process, and the whole European landscape will have sluffed a little deeper into the Great Recession by then. Europe’s sovereign debt crisis will be worse by then and so will its banking crisis … long before this remedy is in place … if it ever is in place. Even the Greek remedy that was already put into law is now back up for grabs as far as all Greeks are concerned.
All of the solutions being used by nations around the world come down to solving a problem of too much debt by creating ways for banks and nations to take on even more debt in the short term. All of the plans bailout rich bankers, which puts no one back to work and creates no product directly to sell.
As a further shortcoming to the present eurozone deal, no increase in bailout funding was approved, and the size of the funds available for bailouts pales compared to the problem. So, even if bank bailouts were a real answer, this wouldn’t be enough money to do the job.
The only real question in my mind is, “Has this kicked the can down the road for a few more months … or only for a couple more days?” I’m betting my predictions on the latter. Every time you cut off one of this Hydra’s heads, it grows two more in the same place. Europe never gets ahead of the blaze far enough to create a fire break. Its leaders just scurry from one brushfire to the next as the overall blaze gets larger.
The Greek problem remains
On the one hand, Ireland’s prime minister welcomed the deal, calling it a “seismic shift” that will enable Ireland to renegotiate its debt on better terms. On the other hand, it is unclear that this plan does anything to shortstop Greece from renegotiating the terms of its deal.
Oddly, Greece fell out of the news completely during the summit debates. That’s quite surprising, given that Greece’s new intent of renegotiating its deal after its elections a week ago made Greece the star-attraction fight going into the summit.
European Council President Herman van Rompuy gave a hint that the deal will not benefit Greece when he summarized, “We are opening the possibilities to countries who are well behaving … to make use of financial stability instruments ESFS, ESM in order to reassure markets.” What countries is “well behaving” meant to exclude? I can think of one. Can anyone else? (I see your hands.)
Unless Greece becomes the topic d’jour during the final European summit meeting today, Greece remains just as big a problem as it was going into the summit. The press, being quick to euphoria, didn’t notice that the summit glossed over the Greek problem entirely. It’ll take a couple days (as in over this weekend) for the markets to realize nothing has changed with respect to Greece, which is where a major part of their fear lay last week. That fear will quickly raise its head as the euphoria of a eurozone deal fades faster than paint can dry. Investors will wake up to find themselves staring down Greece — as big, bad and ugly as ever — over their Monday morning coffee.
For the day, however, the entire press seems to have forgotten all about Greece. Was it more than coincidence that all of Greece’s primary ministers got sick and couldn’t make it to the summit? Perhaps their talk of seeking to renegotiate the one deal where the paint finally had dried was all for the Greek voter. Perhaps their illnesses gave them all an out for not seeking what they could never get away with at the European summit. Or perhaps no one at the summit wanted to listen to them right now anyway.
My prediction on how the Greek problem will end
The austerity measures in Greece’s current bailout plan foolishly assumed that Greece’s economy would slow to a growth rate of 1%. (Don’t know why anyone in their right head would have thought Greece would see any growth this year.) Forecasts should have bet on how fast Greece would decline. The Greek economy is now contracting (in recession) at an annualized rate of 7%. Tough austerity measures, if they are ever actually implemented, will only make the Greek economy recede faster. It is already estimated that the annualized contraction will be 9% by the end of the third quarter, and Greece already faces 23% unemployment.
There is no ideological answer here that will work — conservative austerity or liberal stimulus. This is a mathematical problem. Greece needs to zero everything through bankruptcy and get it over with, and then Europe will have to pick up the pieces with a hole where Greece used to be. The longer they put off this failure, the more the whole of Europe gets sucked into it. With bankruptcy, the Greek people could begin again while living within their means … if they’ve learned anything.
That leaves a mathematically dictated prediction here: Greece WILL leave the Euro. The chances that it can avoid that are small. The sooner it does, the sooner Europe can begin repairing the hole it leaves. I think Europe’s leaders have begun to resolve themselves to the fact that they cannot save Greece, especially if it wants to renegotiate its deal. That may be largely why Greece was not a topic that came up publicly at this summit. Summit leaders may have made it clear they were going to focus on other problems and leave Greece behind for now.
Further reading on the european debt crisis: