Europe ends year on front foot
Credit where credit’s due, the EU has surprised on the upside over the last 24 hours or so, not only signing off on a revised Greek bailout plan to keep that show on the road and agreeing that the ECB will supervise 150 or more of the bloc’s biggest banks, but then pledging to set up a mechanism to wind down problem banks.
Now, there is many a slip twixt the cup and the lip as they say – not much more is going to be cemented until next autumn’s German elections are out of the way, the ECB only has direct oversight of 5 percent or so of euro zone banks (when we know from the financial crisis that smaller banks can be almost as lethal as the big boys) and there is no indication of how a bank resolution scheme would be funded (perhaps via a financial transaction tax although only 10 or so countries have so far committed to that). Also, direct recapitalization of banks by the ESM rescue fund, to take the burden of indebted states, is unlikely to happen before 2014.
Nonetheless, we shouldn’t be churlish. EU leaders are clearly using the window of calm created by the European Central Bank’s pledge to buy euro zone government bonds in whatever size is needed to shore up the currency area in order to press on with the permanent structures which will ensure the bloc’s future. So while Finnish Foreign Minister Alex Stubb’s assertion that the EU is in its best shape for years may be pushing it a little, his follow-up line that if you’d offered them this state of play at the start of the year they’d have snatched your hand off is hard to argue with.
The FT has just made Mario Draghi its man of the year and it’s just as hard to argue with that. His declaration that he would do whatever it takes to save the euro was the pivotal moment of 2012.
Day two of the summit is likely to be uneventful, in debt crisis terms at least. The other big setpiece on offer is the ECB’s twice-year financial stability review which will show just how precarious the euro zone banking system still is. We will also get a fresh snapshot on the health, or lack of it, of the real economy (see below).
Italy is the other live tale to keep an eye on. Technocrat premier Mario Monti put the ball firmly in Berlusconi’s court by calling time on the government to set up early elections. Cunning old Berlusca has batted it back by saying he would stand aside if Monti stood as the head of a centre-right coalition (thereby presumably requiring Berlusconi’s ongoing support). Surprisingly, Monti turned up at a centre-right parties’ gathering in Brussels yesterday, where Berlusconi repeated his offer and others made the same call. The markets would be very happy if Monti stayed at the helm after February elections but more than anything they want a bit of certainty and the absence of Berlusconi.
Italy is one of the big risks next year but there are others. Greece has slipped on its commitments too many times before to be confident about and while Fitch has just affirmed France’s AAA rating it has reminded it of how little room for manoeuvre there is. It now forecasts French debt just shy of 100 percent of GDP by 2014 and that any slippage from there will inevitably result in a downgrade. France – its ability to deliver a lower deficit and embark on structural reforms next year – bears close scrutiny. And then there’s the endless Spanish bailout guessing game and Madrid faces a daunting-looking debt refinancing mountain next year.