At this point, the scenario is all-too familiar. A new European country—Greece, Spain, or Italy—gets in trouble. Markets swoon. European leaders spend weeks hashing out a new rescue plan. They meet, hopelessly deadlocked. The world holds its breath until, at the last minute, the new “solution” is announced. Hallelujahs and hosannas ring. Markets recover. As the week drags on, analysts pick holes in the agreement, market confidence drops, and the cycle repeats. For the past two years, this has been the invariable news cycle that comes out of Europe.Many, however, believed that this time was different. At a meeting in Brussels last week, Italian PM Mario Monti faced down German Chancellor Angela Merkel, and left with an agreement that, while not the solution to all of Europe’s problems, at least appeared to pave the way for more constructive agreements in the future. The markets have rebounded, and the predictions of imminent doom for the euro have cooled somewhat as analysts wait to see what will happen next. Could Europe finally be on the right track?But while the markets are still happy with last week’s meeting, many of the experts are already starting to pick holes in the agreements. In one particularly incisive piece, the widely respected Financial Times analyst Wolfgang Munchau argues that the new bailout will not work.Among other things, Munchau points out that, while the rules for European bailout funds to buy Italian bonds have changed, there still isn’t enough money in the funds to get the job done. The ESM does not have enough money to bail out Spain, Spain’s banks, Cyprus, and also Italy. Nothing in the new agreement changes that:
Mr Monti may have secured the right kind of deal politically but to solve the ESM’s size problem he really should have insisted on a banking licence. With that, the ESM could have leveraged its lending ceiling to a more realistic level. It will not be able to do this now.This is why 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.
Many analysts still appear to disagree, and the secret of this agreement, like the other agreements that bought more than a very temporary peace in the markets has been that whatever its long term flaws, it addressed the particular concerns that had brought the market to the brink.Whatever the timing, Munchau is right about the main thing. Europe isn’t fixed yet. The latest agreement was another cease fire between Germany and the Axis of Gimme, not a permanent peace.