Yet another European summit ended today with yet another round of announcements. Yet again Germany brought Europe and the world to the edge of a global market meltdown and yet again Germany blinked at the last moment. As the relief rally sweeps around the globe (many European stock markets are up two percent or more and US futures are also looking good), yields on Spanish and Italian bonds are falling, and the euro is up sharply against the dollar.
But as in all the other relief rallies after all the other summits, investors and experts around the world will soon start picking at the shiny new European agreements to see how much substance they have and whether the crisis is really over or whether the whole sickening process of uncertainty and speculation is about to start over again.
Via Meadia‘s first impression—and this may change as more details come out—is that this agreement is going to work better than the last one. The agreement that was supposed to end the crisis by bailing out Spain’s banks was so flawed and so inadequate that the relief rally dissipated within hours rather than days or months. It looks as if the current agreement will buy more time: It addresses the issue that keeps bringing Europe to the precipice by offering hope that both Italian and Spanish debt yields will be kept low enough—for a while—that we could have a significant breathing spell before the next near-death experience for the world financial system.
What makes this set of agreements sturdier than some others? First, the European leaders appear (and I stress that word; this is the kind of issue that investors will start probing and testing to see how solid it is) to have fixed the biggest flaw in their last agreement. The agreement to bail out Spanish banks with European money actually increased the risks to private holders of Spanish bank debt. This time around the EU leaders have said at least that they won’t demand special treatment for official debt that pushes private creditors to the back of the line in any debt restructurings. Some other accounting tweaks will remedy some of the other flaws in the last bailout proposal.
Second, it appears (that word again) that a mechanism may soon be in place for effectively capping the rates that Italy and Spain have to pay in new bonds that they issue as long as they adhere to their budget commitments. Big news for Italy and Spain: as long as they stick to their current commitments they won’t have to endure new and humiliating conditions of the kind the Greeks have been made to sign on to.
These last agreements in particular mean a lot to the prime ministers of Italy and Spain. It gives them something concrete to take back to their countries and reinforces their authority and prestige at home. Monti in particular can now tell his countrymen that his policy of cooperating with EU authorities works better than the Berlusconi policy of defiance.
The relief is immediate; the problems show up down the road. The current agreements depend on the quick development of a single bank regulator for the Eurozone, taking control of national banks out of the hands of national governments. If that happens, it will truly be the biggest step toward financial integration since the birth of the Eurozone, but it will mean a far more significant surrender of national sovereignty than many of Germany’s partners are ready to accept.
Americans don’t think much in these terms, but for many European countries, the nexus between governments, big business and the big national banks is much tighter and much more important than it is in the US. For European countries national oil companies, automobile companies and so on are “national champions” and their defense is seen as vital to the preservation of the independence of the country itself. (No single US corporation is as important to our economy, our financial markets or our government as the largest firms in European countries tend to be to their homelands.) The big French and Italian banks work with the government and the big companies and often have much more interlocking ownership and overlapping boards of directors than the larger and more diffuse American corporate sector typically does. The national regulatory body in those countries consciously works to support the big national banks and to nudge the banks to support national companies and to carry out other operations in support of government policy.
Surrendering this authority to a European-level regulator represents a huge concession. It is one that Charles de Gaulle, for example, would have never accepted. It is not just a technocratic adjustment in European bank management; it represents at least potentially a revolution in the way governments and economies work in much of Europe.
For just this reason, setting up a European bank regulator is going to be a hard thing to do. At the very least, look for the French to insist that the head of the authority come from the ranks of the tightly knit French establishment. There will also be furious fights over the nitty-gritty details of the new systems as the various countries try to write in protections for their national banking systems and the particular ways in which their banks serve the perceived interests of the state and the powers that be. Germany has its own issue here; its “landesbanks”, banks closely associated with Germany’s equivalent of US states (like Bavaria, Saxony and so on) have been operating as political as well as financial entities for some time, and their fate is an important issue in German politics.
In this sense, the European leaders haven’t ended the squabbling and the bickering that repeatedly brought the world to the brink of the abyss in the last two years. They have moved that squabbling into a new arena, while taking the precautions that will prevent a meltdown in the immediate future. Beyond the banking union, which they have said they will accomplish quickly, there is the even more contentious problem of a financial union that would be addressed next.
The spin being put on this agreement—that Merkel blinked—is not quite accurate if this analysis is correct. An agreement to move toward a European banking agreement is a serious step on the road to dismantling the sovereignty of individual European countries that the German vision of a federal Europe ultimately requires. She may well get her money’s worth out of this summit—but we shall have to wait and see.
On first glimpse, then, this agreement—while clearly not an end to Europe’s problems—looks much more solid than the fatally flawed Spanish bailout agreement. It will be tested, and the question is likely to be in the short term whether Europe can keep yields on Spanish and Italian bonds at reasonable levels. It seems likely that this can happen for a while at least.
So: the European problem isn’t over, but the European system, flawed as it is, lurched away from the cliff. The messy process of constructing a real European union continues while trying to avert a financial catastrophe, and we can’t yet predict whether it will work or what the final product will be.