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Make Way For Debt Mutualization In Europe

Two significant developments in the EU last week give me even more hope for Europe.

- Scott Minerd (@ScottMinerd)

While the Northeast braced for Sandy and the rest of the country turned its attention toward the election, there were two significant developments in the European Union. The first was that the Troika, comprised of the European Commission (NYSE:EC), the International Monetary Fund (NYSE:IMF), and the European Central Bank (ECB), recommended cutting peripheral countries' official debts, which includes debt held by institutions. This would follow the haircut on publicly owned debt that occurred a few months ago. The other major development is that it is now likely that an agreement will be reached on budgetary regulation.

The proposed debt-relief program is significant because the Troika owns those obligations. Writing off a large portion of Greece's debt would be a major step forward in clearing up the present crisis and getting the immediate concerns about Greece off the table. The catch, however, is that the initiative remains politically unpopular among German voters, and Dr. Merkel and her cabinet are acutely aware of this as they head into an election year.

ECB President Mario Draghi and Germany's finance minister, Wolfgang Schäuble, are now working much more closely with one another. The two have been in agreement on a number of topics recently. Schäuble was openly supportive of Dr. Draghi's testimony in front of the Bundestag in late October, when Draghi managed to relieve some of Germany's concerns over the inflationary risks in his policies. Between that and Dr. Draghi's endorsement of what I would call the "Über Budget Regulator" that originated in Germany and will be proposed in December, the ECB and the core are cooperating to a greater degree than ever. There will inevitably be fits and starts but it appears Europe will continue moving toward federalization.