Investors were treated this week to another eurozone roller coaster ride. On Friday there was a “relief rally” based upon the fact that the eurozone leaders were able to forge some type of consensus in addressing its roiling financial crisis. This was clearly better than what most had feared.
Under the Hood: However, looking under the hood, what you have is an inter-governmental agreement basically acknowledging that the 17 participating euro zone governments will comply with deficit restrictions, cede national fiscal sovereignty to a supranational organization and subject participants to automatic sanctions in breaching the terms of the agreement.
Running on Empty: In reality, 12 of the 17 eurozone countries in 2011 will be running deficits greater than 3%—the current self-imposed budget limit for participating members. The question is: what kind of sanctions would be imposed on non-compliers? It’s not like you’re dealing with North Korea or Iran where sanctions are intended to topple regimes. Tough sanctions would just create a “death spiral” in countries that may be hobbled economically dragging the rest with them.
OECD warns of lower global growth and lowered its forecast for its 34 members to 1.9% in 2011 and 1.6% in 2012 from 2.3% and 2.8%, respectively. The organization anticipates a mild recession in the eurozone. Given that the European Union is staring at a recession—mild or otherwise, the ability to both finance and reduce the sovereign debt is problematic in the near term. And we haven’t even started talking about the banks.
Coming Up Short? The items where this summit fell short include the U.K. opting out. This makes this agreement a non-starter as a broader European Union treaty change. Secondly, and more importantly, the summit did not produce a commitment by the head of the European Central Bank (ECB) to a wholesale rescue of sovereign debt of participating countries nor their banks.
The Devil’s Boots Don’t Squeak: Now that we enjoyed this victory lap, it’s time to give the Devil his/her due. The focus will now turn to the process and details of administering and punishing non-compliers—and this is where the Devil lives.
The Sixth Eurozone Crisis Summit: Unless the ECB weighs in with the ability to create euros to support sovereign and related bank debt, we are all just waiting for the sixth eurozone crisis summit to be announced.