But this was only the foreground spectacle. If you look behind the curtain, you will find that, for Italy at least, nothing has changed at all. The European Stability Mechanism was already able to purchase Italian bonds in the open market. The instrument was there, but not used. The agreed changes are subtle. Italy must still sign a memorandum of understanding, and subject itself to the troika - the International Monetary Fund, the European Central Bank [ECB] and the European Commission. The procedure will be less invasive, more face-saving. But there will still be a procedure. [my emphasis]The emergency fund, the European Stability Mechanism (ESM) which is supposed to buy bonds and provide aid to private banks in crisis doesn't have enough funding:
It has a lending capacity of €500bn - and that has not changed. No matter how you twist and turn it, the ESM is simply not big enough. It will inject equity into Spanish banks. It will need to refinance the programme for Greece, Ireland, and Portugal. It will soon have to cope with Cyprus and, who knows, maybe Slovenia as well. A full-scale programme for Spain still looks likely. I cannot see how you can fit Spain under the umbrella, plus Italian bond purchases.Münchau notes what others have, as well, that for the ESM to be an acceptable substitute to the ECB as a buyer of last resort for sovereign debt, it would also have to be licensed as a bank, which is not part of the meager EU summit results.
He sees Frau Fritz as the winner at the summit - and that's not a good thing:
I believe the real winner of last week's summit was not Mr Monti but Ms Merkel after all. She managed to keep Germany's liabilities unchanged. Someone will have to explain to me how we can have no change to Germany's overall liabilities, nor of ECB policies, and yet Italy and Spain can now be safe when they were not safe a week ago.He doesn't believe that Frau Fritz will be very cooperative in setting up a decent banking oversight mechanism. He also is concerned about possible legal problems with the projected new role of the ECB.
The bottom line:
The most important event last week was probably not the agreement at the summit anyway, but the statement by Ms Merkel that there will be no eurozone bonds "for as long as I live". My belief is that this statement reveals she is not serious about political union, to which she has been paying lip-service over the past few weeks. Her tactics remind me of the "coronation theory" of the 1980s: the Bundesbank used to say that monetary union was acceptable but only after full political union was completed. It was another way of saying never. I always suspected all this talk about long-term solutions might be a ruse. Now, it seems, we know.Tags: angela merkel, austerity economics, eu, euro, european union
If Ms Merkel is right and there are no eurozone bonds in her lifetime, the eurozone will not survive. Without eurozone bonds or a change in ECB policy, Italy's and Spain's debt - and eurozone membership - is not sustainable. That was as true on Wednesday as it is today. [my emphasis]