THE Financial Times reports today that euro-zone leaders have reached a deal on a series of measures designed to solve the currency area's ongoing debt crisis. At first glance, the numbers look impressive. Euro-zone members will bulk up funding levels for the European Financial Stability Fund and its post-2013 successor, the European Stability Mechanism. The plan would also give the EFSF the ability to buy some government debt. Sovereign bond yields around the periphery are down this morning, presumably as a reaction to the agreement.
And yet there's less here than meets the eye. The FT says:
EU officials, including European Central Bank president Jean-Claude Trichet, had long argued that they should be able to do more than just bail out troubled economies.
But in the face of German and Dutch resistance, the 17 leaders chose a more limited route. The funds will be able to buy bonds, but only directly from a struggling government – not on the open market – and only after that government agrees to austerity measures similar to those im-posed on bail-out nations.
The new powers may help struggling countries return to the debt markets more quickly, but because they can only be used in a narrow set of circumstances they are unlikely to have any impact on the current borrowing costs of countries such as Portugal.
That's bad, obviously. The agreement seems not to push the ball forward on debt restructuring, either, which appears inevitable for Greece and Ireland, and perhaps for Portugal as well. The hoped-for increase in fiscal integration will also have to wait. And of course, the underlying economic strain in much of the euro zone remains. As austerity grows less popular—and the new bond-buying authority could only be exercised in cases where countries have accepted substantial austerity—economic performance around the periphery lags while the ECB plans rate increases.
It's not hard to understand why Europe can't agree on the hard questions: they're the hard questions. But eventually they'll need to be answered. Yields on troubled debt are down, but not by very much. Absent real solutions, they'll be up again in no time, and the euro zone will find itself struggling, once more, to resolve its fundamental problems.
Source: www.economist.com
And yet there's less here than meets the eye. The FT says:
EU officials, including European Central Bank president Jean-Claude Trichet, had long argued that they should be able to do more than just bail out troubled economies.
But in the face of German and Dutch resistance, the 17 leaders chose a more limited route. The funds will be able to buy bonds, but only directly from a struggling government – not on the open market – and only after that government agrees to austerity measures similar to those im-posed on bail-out nations.
The new powers may help struggling countries return to the debt markets more quickly, but because they can only be used in a narrow set of circumstances they are unlikely to have any impact on the current borrowing costs of countries such as Portugal.
That's bad, obviously. The agreement seems not to push the ball forward on debt restructuring, either, which appears inevitable for Greece and Ireland, and perhaps for Portugal as well. The hoped-for increase in fiscal integration will also have to wait. And of course, the underlying economic strain in much of the euro zone remains. As austerity grows less popular—and the new bond-buying authority could only be exercised in cases where countries have accepted substantial austerity—economic performance around the periphery lags while the ECB plans rate increases.
It's not hard to understand why Europe can't agree on the hard questions: they're the hard questions. But eventually they'll need to be answered. Yields on troubled debt are down, but not by very much. Absent real solutions, they'll be up again in no time, and the euro zone will find itself struggling, once more, to resolve its fundamental problems.
Source: www.economist.com
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