The European summit, ostensibly one of the many that will take place as the year wears on, that started in Brussels on Thursday created a lot of expectations around comprehensive policy measures needed to reign in the European crisis.
Global markets are looking at tangible outcomes rather than statements that merely outline purposes, although the initial market reaction begged to differ. To be more specific, markets will be looking at some sort of announcement on the three pillars required for greater European integration, namely the fiscal union, the banking union and political union, says Marie Diron, economist at Oxford Economics and an adviser to Ernst & Young LLP. These are medium to long term measures that businesses and investors would like to see before confidence returns to the market.
In the short run however, the onus to act lies with the European Central Bank since it can move very quickly and start buying Spanish and Italian bonds that will bring down borrowing costs. Also economic growth should be given prominence and pushed higher up the pecking order involving some investments that can create jobs in a hurry. Also reforming the labor markets to bring back competitiveness, especially the peripheral markets, should be high on the agenda.
Asked if there is an increased reluctance on the part of Germany to commit more funds in terms of debt mutualisation (debt sharing) or committing more funds for growth without getting anything in return, Marie said Europe is witnessing a big change in responsibilities in terms of sharing of responsibilities and transfer of wealth, and understandably there will be some reluctance on the part of the countries till they can bring the electorate on board.
However, a consensus over greater integration is gradually building in the region.
As far as borrowing costs for Italy is concerned, high sovereign bond yields over a long period of time will put extra pressure on the government, limiting its ability to meet the country’s fiscal objectives.
Although the constant escalation of borrowing costs that were witnessed last year have somewhat slowed down, you just can’t be sure that the Eurozone will retain its shape in the current form and that’s being reflected in the region’s bond yields.
One of the sticking points of the ongoing negotiations has been the lack of any timetable for the proposed fiscal or political union. However, the European Council can’t be blamed for it since it’s the responsibility of the governments to finalize the dynamics. Hopefully, there will be more clarity on these issues by the end of the year, although I doubt that the markets will be willing to extend that much leeway. You can watch the video here.
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