Cullen Roche, picking up on a thread recently spun by Warren Mosler, observes that Europe appears to be moving toward a more functional union. Germany's approach is very conservative on its face, demanding more centralized control over member nations' budgets and fiscal affairs. However, this may well be the concession it demands for agreeing to a more complete monetary role for the ECB (under soft currency regimes, the distinctions between monetary and fiscal policy tend to become irrelevant, and bifurcating them can create problems as the EMU is learning).
Reuters and the WSJ are reporting similar rumors about further integration (see here and here). The timeline here is for the December 9th summit so it wouldn’t be shocking to see a face ripper rally in equities in the coming weeks leading up to that meeting. There are A LOT of investors caught flat footed right now betting on the end of the world scenario.
He may be on to something, judging by stock market futures and the Sunday performance of bourses like Tel Aviv. European market futures are moderately positive (tellingly, U.K. stock market futures are in the red, and it's worrisome that Hong Kong is too), while the Tel Aviv market indices are up by more than a percent.
As far as a fiscally and monetarily integrated Europe goes, there's still plenty of distance between here and there. But assuming the EMU and EU can make substantial progress on the necessary measures, what might the implications be beyond a short-term risk rally?
- It would lower the risk of a systemic financial crisis dramatically (as long as the ECB is empowered to backstop government credits).
- If austerity remains the primary fiscal objective within the EMU, it will not take a recession off the table.
- The impact on China, which is the other current wildcard in the global economy, is likely to be marginal (though positive).
So while we agree with Cullen and Mosler that Europe appears to be groping its way toward a more perfect monetary union, and that notable progress in that regard would probably ignite a rally in risk assets, it will not undo some of the other bearish developments we see in the global economy.
From an investment standpoint, there will still be room for some negative betting. But perhaps the most obvious implication is that if an EMU bazooka is indeed in the works, it would be time to go bottom-fishing in European equities. 2008 suddenly turns into 2009?
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