AMERICAN FUTURE

UPDATE. The Financial Times Alphaville blog quotes the Royal Bank of Scotland on what’s wrong with the new Greek bailout:

. . . after almost 3 months of negotiations and effort, the Greek debt load will be at best reduced by 10 to 20 percentage points of GDP to what will still be seen as an unsustainably high level. Overall, this will have been an expensive political decision. In the end, Greece will likely continue facing a rolling crisis around IMF quarterly reviews. Doubts about the trajectory of the economy and the ability to raise privatisation receipts anywhere near the targets will persist.

The statement clearly gives the impression that euro area policy makers are increasingly ‘getting the message’, with 3 new tools being created: a precautionary programme, a lending facility for non programme countries to recapitalise banks and a bond buying programme in the secondary market. However, the level of detail provided is low, making it hard at this stage to really tell how the new tools will work in practice and how efficient they will end up being. In particular, there is insufficient information available to tell how preventive those tools will end up being deployed and this is related to the lack of clarity surrounding the so called “appropriate conditionality” that will be imposed on member countries accessing these new help mechanisms.

In our view a key limitation of the announcement is that it did not address the size of the EFSF [European Financial Stability Fund]. We have recently argued that a prerequisite to increase the flexibility of the EFSF was to increase very significantly its size with a view of ultimately having a lending capacity of around Eur2trn. Indeed, under the amended EFSF which will aim at having a lending capacity of Eur440bn, and given current and likely commitments, the EFSF will be left with a little more than Eur300bn of lending and or buying capacity – a too small amount to restore investor’s confidence that the euro area has once and for all dealt with its sovereign crisis. The crisis will in our view linger with markets likely to test the EFSF firepower.

The Alphaville post closes by noting that the recent downtrends in the yields on Italian and Spanish government debt have reversed:

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Not unexpectedly, opinions on the outcome of the emergency summit concluded last Thursday evening continue to be mixed.

Tony Barber, in the Financial Times, pens perhaps the most positive take I’ve run across:

Eurozone leaders . . . have pulled off quite a feat. For the first time since May 2010, they delivered a positive surprise by striking a deal that went further than many financial market participants had anticipated.

[...] Europe moves forward incrementally – sometimes a stumble, sometimes a step, sometimes a stride. It cannot be otherwise in a union of democracies that have pooled some sovereignty but have retained the features of nation-states. The complicated structures of European decision-making do not help. In trying to ward off the mortal threat to European monetary union, the eurozone’s leaders still look a little off balance but, on Thursday, they gave every impression of heading towards fiscal union.

Lest he be accused of wearing rose-colored glasses, Barber lays out his concerns:

Of course, this will not end Europe’s sovereign debt and banking crises. It may only be a matter of months before Europe’s financial firefighters reach for their hoses again.

[...] certain gaps in economic governance cry out for attention. Most of all, the eurozone needs credible enforcement mechanisms to ensure governments do not break agreed fiscal rules . . . the crisis is compelling eurozone leaders to assemble the building blocks of a common fiscal policy and economic government. They will surely have to go further . . . the path to a closer economic union contains a potential pitfall – public opinion. Politicians in Germany and rich countries such as Austria, Finland and the Netherlands have never asked voters if they want a union that channels part of their wealth to other countries. According to a poll for ZDF public television, only 47 per cent of Germans want Greece to stay in the eurozone; just as many want Greece to get out.Similar tensions extend across the 27-nation EU. The rise of far-right and anti-euro parties is a reminder that the EU stirs disenchantment among millions, who see it as an elitist project incapable of tackling issues such as youth unemployment and illegal immigration. Pan-European institutions bore voters: turnout has fallen in every election for the European parliament since the first in 1979. Sooner rather than later, politicians must address the problem of legitimacy. The paradox is that the debt crisis is driving Europe’s leaders towards closer integration while simultaneously sapping the public’s faith in that same goal. [My emphasis]

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Wolfgang Munchau, on the other hand, is skeptical. In the Financial Times he says that

. . . the effectiveness of an agreement should not be gauged by the immediate market reaction, let alone by how the agreement compares with expectations. For it to be a positive contribution to the eurozone debt crisis, it should meet three tests. Will it put Greece on a path towards sustainable debt reduction? Will the new rules for the European financial stability facility make contagion less likely? And is the participation of private investors realistic and fair? My answer to those three questions would be, respectively: no, no, and yes.

[...] Thursday’s agreement succeeded in staving off an imminent collapse of the eurozone. That is undoubtedly its greatest achievement. But we should not fool ourselves. It will only succeed if it is followed by other agreements that fix its gaps . . . When the Europeans return from their holidays, they will still have the euro – and they will still have the crisis.

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In his column in London’s Telegraph, Ambrose Evans-Pritchard says that Chancellor Merkel faces a revolt over the debt deal:

Jens Weidmann, the Bundesbank’s chief, said the accord exposes Germany and other creditor states to “sizeable risks” and greatly alters the EU’s constitutional landscape: “The euro area has taken a big step toward a collectivisation of risks. This weakens the foundations of a monetary union where each is responsible for its own budget. In the future, it is going to be even harder to uphold incentives for solid fiscal policies.”

Frank Schäffler, finance chair for the Free Democrats (FDP) in the ruling coalition, said the summit deal threatened “the castration of Germany’s parliament” by shifting budget power to Europe. Schäffler said there is already talk of a “third rescue package” for Greece. [My emphasis]