Charles Wyplosz is restraining his enthusiasm over the EU summit results - for good reasons

Charles Wyplosz (One more summit: The crisis rolls on VoxEU 06/30/2012) makes explict something that some of the coverage of the EU summit results fudges, e.g., Rebecca Christie and Jim Brunsden, EU Banking Debate Shifts to Euro Area After Accord on Spain Bloomberg News 06/30/2012. That is, the deal doesn't solve the immediate pressure on Spain caused by its failing banks. And by immediate, I mean now.

The year-end target of allowing the eurozone rescue fund, the European Security Mechanism (ESM), to directly assist failing banks without adding to the sovereign debt in the countries where the banks are headquartered is a year-end target, or later. Wyplosz writes:

Within hours [of the summit results announcement], the main conclusion drawn by the markets was that the Spanish public debt had grown by €100 billion, bring Spain closer to the fate of Ireland (bad bank debt dragged down a government with an otherwise healthy fiscal position). ...

This [the actual agreement] means that, in the end, the Spanish debt will rise by €100 billion (the market participants who enthusiastically celebrated the decision by raising the price of Spanish bonds will eventually understand that). Ditto in the not unlikely case that some Italian or French banks wobble before December. [my emphasis]

For the moment, that part of the summit agreements is little more than a diplomatic head-fake.

Wyplosz also sees a gigantic hole in the proposal for central bank supervision, to which the revised bank bailout approach is attached:

This could be a single Eurozone supervisor built inside the ECB, which would go a long way to plugging one the worst mistakes in the Maastricht Treaty (lack of a joint regulation and restitution regime for banks).

But this is not what the official text says, which makes one suspect that policymakers have not agreed to something simple and clean. Most likely, they will keep negotiating and come with the usual 17-headed monster that exhausted diplomats are want to invent.

This is important because a contagious banking crisis that hits several large banks would require much more money than is available in the EFSF-EMS facilities. In that case, the ECB will have to step in. In fact, the whole idea to have a single supervisor trusted by the ECB is to make it possible for the ECB to at long last act as a lender of last resort.

Unless the supervision regime is clear and clean, the ECB will not be able to do its job and a contagious crisis would turn into a full-blown disaster.

Wyplosz also shares the impression I took from this that French President François Hollande got bought off on his opposition to austerity dirt-cheap, pretty much in the same arrangement in which German Chancellor Angela Merkel bought off Hollande's sister party in Germany, the SPD:

The summit also agreed on a “Compact for Growth and Jobs”. This is a long and familiar litany of all the good supply-friendly reforms that have been advocated bi-weekly by the Commission for some twenty years plus a present to President Hollande. The present has been crafted in Berlin to give the new president a face-saving “victory”: he can go home and claim that he has obtained a victory in his determined war on austerity.

The pact allows for the mobilisation of various EU facilities for a total amount of some 1% of EU. Given that these amounts are tied to all sorts of criteria (small and medium enterprises, energy and broadband infrastructure, and other great causes), that they will be spent "across the whole European Union, including in the most vulnerable countries", and that "fast disbursement" by the European bureaucracy does not operate on the same time scale as a financial crisis, this compact costs little and will do nothing for the Eurozone debt crisis. [my emphasis]

Politically, this strikes me as the most significant result of the summit this past Thursday and Fridahy. Hollande folded completely. Angie punked him. She owns him now.

Angie is a nasty piece of work. But her bulldozer methods are still working for her. The fiscal suicide pact to which both the SPD and now Hollande have agreed to support is a spectacularly bad idea. The fact that Hollande capitulated some completely on this point is a sign of how saturated the French Socialist Party also is with neoliberal ideology. In his supposed opposition to Angienomics, Hollande basically folded after the first blow from the Angienator. I disagree with

Wyplosz' comment at the end, "There was no knock-out winner in this summit, but on points I'd have to say that the winner is the crisis." Wrong. The Angienator won. Especially by punking Hollande in their first serious competition.

Wyplosz also explicitly notes what the optimistic coverage of the summit seemed to miss: "There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries." Yes, Angie won. The people of Europe lost, especially those in Greece, Ireland, Italy, Portugal and Spain.

Tags: angela merkel, austerity economics, eu, euro, european union, france, françois hollande, greece