As markets quickly shrugged off the news including that of further central bank rate cuts. Spanish bond yields rose over 7%, as Mr. Market clearly wanted a resumption of bond buying or some other decisive action, rather than a mere reduction of its benchmark rate to 0.75%.
Some commentators, such as Edward Hugh, are a bit flummoxed, since the supposed clarification of key points of the deal, most importantly, how and when Spanish banks will get money, has not answered these basic questions. Wolfgang Munchau argues in his current column, “Eurozone crisis will last for 20 years” that the Europatchup of last week wasn’t simply underwhelming, but was a major step backwards. He confirmed something we took note of yesterday, that Germany insists that there be no bank bailouts until a banking union is in place. That’s putting the medium term before the short term. And Munchau says this is even worse than it sounds, since a banking union requires a political union.
Before we even get that far, Munchau points out that what Merkel is willing to do will not only be impossible to achieve in time to arrest the escalating crisis in Spain and Italy, but is also inadequate in scope:
A group of 160 economists, led by Hans-Werner Sinn, president of the Ifo economics institute, last week published a manifesto against a banking union. It was full of sound and fury, but the importance of this document is that it reflects a consensus view.
Angela Merkel’s answer was revealing. She told them that there is nothing to worry about. The banking union was about joint supervision, she said. There will be no joint deposit insurance. She has a very different understanding of a banking union than the European Central Bank. At most, I expect this new banking union to cover the 25 largest banks, and leave those cajas and Landesbanken in national control…
The banking union that is required is the one Germany will not accept: central regulation and supervision, a common restructuring fund and common deposit insurance. It would take years to create. If done properly, it would require a change of national constitutions and European treaties, if only to redefine the role of the ECB. It is sheer madness to make crisis resolution contingent on the success of what would be the biggest European integration exercise in history.
And Munchau sees no way out given the current strictures imposed by key players, in that Germany is firmly opposed to a Eurobond and the ECB is not monetize debt. It seems that most American financial professionals, conditioned by the emergency responses of the Fed and Treasury, believe the ECB will step to the plate to prevent an unraveling. But the US had three key actors, Paulson, Geithner, and Bernanke, who all put saving the banks above anything else and among them had enough institutional authority to do a great deal, largely untrammeled. By contrast, the ECB sees its authority as more limited, and the key actors lack a common vision and a sense of urgency. As much as Munchau often comes under fire for being a Euroskeptic, the political gridlock in the face of an escalating crisis says his dour forecast may indeed come to pass:
The message I took away from the summit is that the eurozone will not resolve the crisis. In that sense, it was indeed a “historic” meeting.