Fisher Investments Editorial Staff
Geopolitics, Developed Markets

Nineteenth Time’s the Charm?

By, 06/26/2012

EU leaders hold their next summit on Thursday and Friday—the 19th since the PIIGS troubles began. If you take Italian Prime Minister Mario Monti at face value, it’s make-or-break—a fruitless summit, he claimed last week, could fuel rising debt yields, economic weakness and less political unity in peripheral and core Europe alike.

Considering how anticlimactic the last 18 summits proved—and how nonplussed markets were, on average, in the aftermath of each—this warning seems a stretch. We rather doubt even Monti bought what he was selling—this likely wasn’t a prediction, just an attempt to literally scare one Angela Merkel into compromise.

Since Spanish and Italian yields have risen, Monti, Spanish Prime Minister Mariano Rajoy and French President François Hollande want the ESM and EFSF to buy Italian and Spanish debt, picking up where the ECB’s Securities Market Programme left off. But the German Chancellor is blocking this, taking her typical hard line to (likely) curry favor with German voters and lawmakers who don’t want to assume liability for peripheral sovereigns. Thus, Monti likely sought to goad Merkel into compromise by hitting two of her pressure points—suggesting even German growth could weaken if she doesn’t agree and, more pointedly, referencing Silvio Berlusconi’s “return to the lira” comeback bid as evidence of the political fallout should Merkel not compromise. Her pet project, remember, is a European political union—thus Monti basically said, “If you want it, stop stonewalling.”

There’s no guarantee the ploy works—Merkel’s said she wants to help, but her hands are tied. Germany’s parliament is scheduled to vote on the ESM treaty and fiscal pact on Friday, and Merkel’s running on borrowed political capital. She made heavy concessions to ensure bicameral support for the ESM as it stands, and modifying it to permit sovereign debt purchases could derail her tenuous agreement with legislators. Thus, Merkel may remain opposed until the treaty’s ratified and signed by President Joachim Gauck—which won’t happen until after the summit.

Similarly, we wouldn’t expect much progress on Greece’s bailout renegotiations or Spain’s bank aid request this week. Greek delays are already starting—due to Prime Minister Antonis Samaras’s and his now-former finance minister’s health issues, the EU/IMF audit is delayed, forcing official bailout talks to wait. And since Samaras won’t attend the summit, side debates between Germany and Greece over delaying reform implementation also seem unlikely—President Karolos Papoulias, who attends in his stead, has no decision-making power. Meanwhile, officials are targeting the eurozone finance ministers’ July 9 summit—not this week’s summit—as the deadline to complete Spain’s bank rescue. In its formal request Monday, Spain asked officials to channel funds from the ESM to directly banks, bypassing state coffers—something Germans also opposed. A longer deadline gives Spain and Germany ample time to negotiate after ESM ratification.

So, despite the heightened chatter, it’s tough to imagine Summit 19 being any grander than the previous 18—expect the usual talk and rumors, and perhaps broader agreement on the “growth pact” Merkel, Monti, Rajoy and Hollande agreed on last week (which merely shifts EU investment funds to infrastructure projects—hardly a game changer). But the lack of sweeping solutions is likely ok, since this “crucial week for the euro” doesn’t seem any more crucial than the past 104-plus. Be thankful for that, since the long-term solutions currently under discussion—eurobonds, fiscal union, political union, banking union, etc.—aren’t quick fixes. They’re full-scale EU rebuilding projects. It will be exceedingly difficult to get the architecture of EU 2.0 anywhere near right, and building it will likely take years. Rushing wouldn’t be prudent or even possible, given the necessary treaty modifications.

All officials really need to do is what they’ve been doing: Take a gradual approach, make sure backstops are in place, redraw lines in the sand as needed and give the private sector time to find the right solutions. Any politician who says otherwise, no matter how vehemently, is probably just politicking.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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