Peruse the headlines and you’ll see two opposing views of last week’s European summit: Some say it was the latest in a long-line of useless European conclaves while others describe it as a tentative, but real, step toward establishing the contours of a more tightly bound European Union.
The truth is somewhere in between. The good news is that policy makers provided more clarity on how Spanish banks will be recapitalized, mitigating the risk of a Spanish banking crisis. As the Spanish banking system was the market’s principal Europe-related anxiety in the wake of the Greek election, the additional clarity is a short-term positive for risky assets.
Despite the progress, several structural issues remain unresolved.
1.) Who is the single bank regulator? While politicians committed to a single bank regulator, an important step in harmonizing and stabilizing the European banking system, who the regulator will ultimately be still needs to be resolved. Currently, the regulator is likely to be the European Central Bank (ECB).
2.) How will sovereign debt be pooled? Europe still needs to come to an agreement on the pooling of sovereign debt. As of Thursday night, eurobonds remained the topic - at least from a German perspective - that dare not speak its name.
3.) Will there be a European wide deposit insurance scheme? There didn’t appear to be any progress at the meeting on this topic. In the absence of such an insurance plan, or more aggressive backing from the ECB, a euro in a Spanish bank will still be viewed as more dangerous than a euro in a German bank.
4.) How will economic growth be spurred? While Europe is still pledging fealty to the notion of fiscal prudence, there has been little progress on a pro-growth agenda other than a for-now symbolic growth pact lacking concrete details. Given that the existing austerity programs are arguably exacerbating Europe’s recession, this is disappointing. The summit didn’t appear to produce anything new to lift Europe out of recession, or more importantly, to improve the continent’s moribund secular growth rate.
Looking forward, despite the unresolved major issues, Europe is closer to a credible plan to recapitalize the Spanish banks. All in all, I believe the summit went better than it might have, or perhaps we’ve all lowered our expectations for European meetings to the point where just one positive step feels like progress.