The Brussels EU Summit is extremely negative for the decisions that have been taken:
- We are going to converge towards a “German Europe”, based on fiscal austerity and on compression of domestic demand. The stubbornness in rejecting any role for active macroeconomic policies is scary, especially as we are still engulfed into a crisis that could have been substantially worse, were it not for the stimulus packages of 2009. Just ask a question: where would the EU be, if the rules Germany wants, were already in place in 2008?
- The eurozone emerges from the Summit, once again, as the only major economy of the world that does not have a properly functioning central bank. With the support of ECB President Mario Draghi, it was once again made clear that the ECB should and would not act as a lender of last resort.
There will be time to discuss these issues, and to ask where does the EMU go (or does not go) from here.
Here I want to underline the only positive aspect of the meeting: The (self) exclusion of the UK from the process of further integration. This is seen as dangerous by most commentators. I’d argue that it is the only good news that we got from the sleepless night in Bruxelles.
The European leaders could not afford to emerge from negotiations empty-handed, and this forced them to refuse the British vetoes. For the past 38 years the UK has been constantly pushing on the brakes of European integration, obtaining (should I use the term ‘blackmailing’?) compensations and opt-out clauses for every advance that it reluctantly allowed.
The looming Armageddon gave European leaders the strength to finally break free from this grip.
Europe is finally advancing towards increased cooperation. In the wrong direction, for the reasons recalled above, but it is advancing. It is to be hoped that last night we set a precedent, and that in the future the method of enhanced cooperation will become the norm each time that a country blocks the process for selfish reasons.
I made this point in an interview this morning.
An interesting article (in French) written by André Grjebine on imbalances within the eurozone. I plan to write on this as well, in the next days.
There was a lot of noise, yesterday, about the main central banks’ decision to coordinate in maximizing liquidity provision (in dollars) to households and firms. An excellent and clear explanation of what they exactly did can be found here.
Are we effectively at a turning point? I am afraid not, for essentially two reasons:
- The first is that, after an initial moment of euphoria, markets may realize what really happened, i.e. that central banks are preparing for a major Lehman-like event: If the euro breaks down, and if investors flee from it, central banks are ready to act to avoid contagion. This is reassuring, but it also informs us that the main monetary authorities of the planet are seriously considering the possibility of such an event occurring.
- Second, this move, per se, does nothing to address the main source of the problem: the lack of proper Eurozone governance, and the unwillingness of the ECB to act as a lender/buyer of last resort. Major changes on these issues would be a turning point, reducing the risk of a euro crisis, and hence making liquidity in dollars unnecessary.
A safe bet: Financial market euphoria will be short-lived.