EU Le Pew?

by CC December 9, 2011 12:08 pm • Commentary

The new EU agreement has caused a rally in world markets. It does seem to have calmed fears of an imminent meltdown in European debt, but there seems to be a side effect of the new agreement that shouldn’t be ignored. The way I see it, it almost guarantees a Eurozone recession. One that could get pretty nasty because the EU leaders seem to have tied their hands for future stimulative action during a recession. Here are some others’ thoughts on the subject:


I can only add at this stage that, by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy.

The Economist

But the more important element is whether the likely package will be enough to deal with the markets’ fears, stabilise the region’s long-term prospects and all without plunging the economy into recession.

The early reviews aren’t good. Here is Harvinder Sian of the Royal Bank of Scotland.

The Summit has not delivered a solution to the debt crisis even if there is progress to remove sovereignty in budget matters. This problem here is that budgets are not the problem – the macro imbalances are much wider and a policy of austerity will cripple growth for many countries without major stimulus offsets from the rest of Europe.

A similar line is taken by James Nixon at Societe Generale

If there is an obvious criticism of the Summit’s conclusions it is that European leaders actions continued to be guided by a limited and potentially mistaken belief that euro area problems solely stem from excessive debt and deficits. In fact the lack of growth and the inability of countries to generate sufficient nominal income to service those debts is at least as important

Adam Cole at the Royal Bank of Canada sees downgrades on the way.

The impact of the summit had in any case been diminished by the ECB press conference yesterday as the question of whether the measures were sufficient to prompt more aggressive ECB bond market intervention no longer needs answering. The summit outcome, along with the ECB press conference yesterday, make it more likely than not that S&P will carry out its threat to downgrade most of EZ member states in the coming days.

While Simon Derrick at Bank of New York Mellon thinks the deal won’t prevent a Greek exit

Given that last night’s decision confirmed that the Eurozone will remain a “stability union” then we must now ask whether Greece will be prepared to
go through the immense pain of economic transformation while, at the same time, coping with continued political opposition, a strong currency and
monetary policy settings  that will likely be sub-optimal. If not then Athens must decide to leave. This, to us, is the real conclusion to be drawn from last night’s events

So to sum up, if the analysts are right, the leaders are tackling the problems in the wrong way, won’t get enough support from the ECB, won’t prevent downgrades from the rating agencies and won’t stop Greece leaving. Oh dear.

Felix Salmon

It all adds up to one of the most disastrous summits imaginable. A continent that has risen to multiple occasions over the past 66 years has, in 2011, decided to implode in a spectacle of pathetic ignominy. Its individual countries will survive, of course, albeit in unnecessarily straitened circumstances. But the dream of European unity is dissolving in real time, as the eyes of the world look on in disbelief.

Europe’s leaders have set a course that leads directly to a gruesome global recession, before we’ve even recovered from the last one. Europe can’t afford that; America can’t afford that; the world can’t afford that. But the hopes of arriving anywhere else have never been dimmer.

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