Thank you Germany, Italy, Spain and, especially, the European Central Bank. They all said enough to provide markets and investors with a tranquil August so far. The question now is whether they will be able and willing to pivot -- from reassuring words to the series of actions required to enable this tranquility to grow deep roots.
Let us start with some key facts. By the close on July 25th, Europe finances were at a critical level -- again. The yield on 10-year Spanish bonds had surged to 7.3%, rendering the country's debt dynamics highly unstable; and it was probably only a matter of days before it would have lost market access.
With Spain tottering, there were concerns that Italy could not be that far behind. Accordingly, the 10-year yield there had risen to 6.4 percent, fueling concerns that it too would eventually need a bailout.
Such recourse to European funding packages by two of the eurozone's largest economies would have probably overwhelmed creditors' willingness to lend. It would have also undermined the economic and financial fabric of Europe's historic economic integration initiative.
Mario Draghi, the president of the ECB, suddenly (and dramatically) pressed a pause button on all these concerns. In an historic speech in London on July 26th, he reassured the world that "the ECB is ready to do whatever it takes to preserve the euro;" and to be crystal clear, he added "believe me, it will be enough." At his ECB press conference a week later, he wrapped these remarks with partially-defined promises of both financing and conditionality.
Mr. Draghi's words struck that delicate balance between creditors and debtors. The conditionality element opened the door for supportive comments out of German officials; and the financing component was music to the ears of Italian and Spanish officials. With that, hedge funds rushed to cover their shorts (reflecting both perceived changes in risk and high maintenance costs of these positions).
The result was a tumble in yields -- to around 6.2% for Spain and 5.6% for Italy as of August 21st. Front-end bonds experienced an even greater yield compression, providing more reasons for other risk markets to rally. And they did, with the S&P gaining almost 6% in the four week period after Draghi's speech.
The critical challenge now for Europe (and beyond) is to build on these gains, not only to spread financial stability but also to counter the notable weakening of global economic prospects at a time of high unemployment on both sides of the Atlantic (with the notable exception of Germany).
Words alone will not be enough for that. A series of mutually-reinforcing actions are needed, focusing on six key areas:
This is a challenging list, especially for the next few weeks; and it requires the type of political leadership and coordination that, hitherto, has tended to elude the eurozone.
Slippage on any single issue would risk a renewal of financial market turmoil and, with that, a further slide into recession for Europe (accentuated by high youth unemployment, explosive debt dynamics and social unrest).
August was indeed tranquil, and thankfully so. While hoping that this tranquility extends to September and beyond, policymakers and investors would unfortunately be well advised to guard against the return of heightened financial volatility.
This post originally appeared at CNBC.com.
As a European I can tell you: it won't.
To politicians and many European economists the Euro is 100% taboo. They will mend it, repair it, fix it, etc.,etc.. until it finally works. To politicians it is either their pet project or they are shit scared what might happen if they ditch it. To economists it was a ridiculous move they warned against but now the Euro exists they consider ditching it worse than keeping it.
Politicians are working on more centralised Eurozone budget control, but Europe being Europe that will take 25 years of negotiations before a mechanism has been found all parties can agree to.
Nothing against the US, but the EU has an agenda of its own. It is an entity that competes with the US, considers the Euro its flagship and, frankly, couldn't care less about whatever the US's stance on the Euro is.
So, yes. It is indeed very likely the Euro issue will drag on for a yeeeeaaars to come.
The banksters robbed us all. Till we deal with them, we are at their mercy.
The very banksters who crashed the economy with SWAPS gambling, are doing it more and using a 30T$ slush fund from OUR FED!!!!
Finance went from 5% of our economy in 1980 to over 144% when it crashed, made up for with OUR FED 30T$ for free .004%.
More and more intertwined leveraged SWAPS are being used than every before. 100's of trillions in total overhang, that becomes more and more sensitive to the slightest triggers.
The last trigger was the housing downturn. The loans were the horses at the track, the bankster's bonuses would have saved all the toxic loans if the banksters had used it for that as they supposed to.
http://en.wikipedia.org/wiki/Financialization#Financial_turnover_compared_to_gross_domestic_product
it seems the northern europeans are prepared to cut greece loose. thankfully this will force the greeks to stop groveling begin dealing with the new reality of re organizing life and society in what could be a paradise country with a 9.5 million population...this will require an uprooting of the corrupt political class in the country, as well as a basic change in the 'us vs. them' attitude of the greeks towards their government.
in the meantime, financial markets will certainly use the 'grexit' to knock back markets and pull in the chips again - much like in '08. hold on! it will be a bumpy ride...and one that the incumbent president won't appreciate unfolding during the run up to the elections...
The Structural Problem:
THE SECRET OF OZ - Bill Still
http://www.youtube.com/watch?v=swkq2E8mswI
LIFE INC. - Douglas Rushkoff
http://www.youtube.com/watch?v=sOBWhVe68os
WEB OF DEBT - Ellen Brown (1 of 5)
http://www.youtube.com/watch?v=QU0XiklHPMc
The Solution:
"THE LOST SCIENCE OF MONEY" - Stephen A. Zarlenga
http://old.monetary.org/lostscienceofmoney.html
A SHORT HISTORY OF THE "MONEY POWER" - Stephen A. Zarlenga
http://www.monetary.org/wp-content/uploads/2011/10/32-page-brochure-sept2011.pdf
HR-2990 - 09/21/11
http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf
The Global Financial Nuclear Detonation Ticking Time Bomb:
ECONOMIC INFOGRAPHICS
http://demonocracy.info/
DERIVATIVES: THE UNREGULATED GLOBAL CASINO FOR BANKS
http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html
The Ticking Time Bomb Deuterium Trigger On EVERYONE'S BANK ACCOUNTS:
BANK OF AMERICA DEATHWATCH
http://tinyurl.com/6hc5txa
BANK OF AMERICA DANGEROUS DERIVATIVES DEAL
http://www.youtube.com/watch?v=N_XtXhiekQk
In order to solve the EU crisis it's going to take a new approach: These nations need to begin to act, as a result of their interconnection and interdependence, much more like a family. Currently what we're seeing is the bludgeoning of the big spenders, and the reign of nations like Germany.
But this severe austerity doesn't truly help the wealthy EU nations, due to their interdependence with the failing EU nations, just as it severely harms the failing nations. In order to solve the EU crisis a different attitude of mutual responsibility needs to develop. The past needs to be forgiven and a new mutual future needs to be planned together.
Spain and Italy may survive but Greece may not because of culture and reality. Sometime we try to dream away real facts and consequences and in my opinion you must study the cultures very carefully before coming up with a realistic opinion about what countries will be able to adjust.
Many people do not deal with reality and are just hopeful.
Sometimes you are just to far in debt and everyone knows you cannot come out of in any realistic way and so you go bankrupt! That is what people, business and yes soon Countries in my opinion. The difference is that a Country will not sell there land to pay back creditors or lets say Greece, Italy or Spain will not.
Look very carefully at the consequences of what a Country promises to do and then you will have a better grounded opinion if they can live up to their promises.
First, it's not clear the the ECB has the legal authority for mass buys of sovereign debt from troubled EU nations. The Germans have been noting this for some time, and while Ms. Merkel has relaxed her position, it's far from clear she will allow such bond purchases. It's also unclear why it makes sense for the newer EU members, which have kept their debts and deficits reasonable, should be on the hook for "eurobonds" supporting spendthrift nations.
Second, the ultimate problem is that the debt levels of these countries (Italy, Spain, etc), combined with their regular deficits, have become unsustainable. There is little evidence that these nations have the political will to bring their revenues in line with their expenditures. Countries can live with a misalignment of revenue/expenses by borrowing, and can effectively avoid debt problems by economic growth; however, the demographics for Southern European countries are not favorable for growth (too many pensioners and too few young workers).
Expecting the ECB to step in and help merely kicks the can down the road; the same borrowing is going on (albeit at a higher level), and growth hasn't changed. Sure, today's investors will keep lending because they understand that kicking the can down the road makes sure they will get paid for investments today, but this is musical chairs and European taxpayers will get stuck with the bill when the music stops.
"while Ms. Merkel has relaxed her position" ... that is, when it comes to the ECB, meaningless. Within the ECB (actually, across the EU) central banks must be independent. In Germany, not even the Chancellor would publicly give "advise" to the central bank (Bundesbank). Much like our politicians are extremely reluctant or careful when commenting on the Federal Constitutional Court (Bundesverfassungsgericht).
Both are part of our federal "checks and balances" and posts are assigned non-partisan.
"the debt levels of these countries" Also this is not that easy. Spain has less public debt than Germany has. Italy has more debt, but a minimal (maybe this year even none) structural deficit. On the other hand, Italy (as a polity) and Italians (on average) are wealthier than Germany and Germans.
The likes of El-Erian demand (which I think is utterly wrong and misplaced) that 17/27 nations act just like the US, namely letting them deal only with two options (Democrat, Republican) and a limited number of people they need to talk to.
You are also correct that the debt levels of the troubled nations are not as high as some like Germany, but note that Spain and Italy are stuck in horrendous employment situations and are bleeding money, while Germany has low unemployment and no blow-out budgets at the moment. The interest rate is linked to the prospect of repayment, of which both the country's current debt and it's expected economic prospects for the hear future play. All that said, it doesn't change the analysis that Italy and Spain are in very, very tough spots.