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It’s All Up to Europe to Save Itself – and the World

By    |   Monday, 05 December 2011 09:10 AM

Jürgen Stark, member of the Executive Board of the ECB, said solving the current EU sovereign debt crisis is primarily in the hands of governments.

It’s a fact the financial markets continue to have serious doubts about if the weaker eurozone countries will have the political will and the capacity to live up to their commitments and to do whatever is needed to comply with the rules of the game within a monetary union as defined in the EU treaty.

Investors should remember that for solving the crisis, determined fiscal consolidation and ambitious structural reforms will be required -- and the eurozone and the European Union neither constitutes a fully fledged federation nor a political or fiscal union.

At this moment, 14 of 17 eurozone countries are facing excessive deficit procedures all related to budgetary deficits that are above the 3 percent of GDP reference value of the EU Treaty. Keep in mind that even if a significant aggregate structural adjustment of 1 percentage-point of GDP per year was possible, the eurozone would need until 2030 to reduce the debt ratios to below 60 percent of GDP. I can’t see a lot of room for getting sustainably optimistic.

In the meantime, the lingering and expanding eurozone sovereign debt crisis must be halted to avoid macroeconomic and financial disaster, in the eurozone and even beyond.

No country is immune anymore to a loss of market confidence in the eurozone’s public finances. The eurozone policymakers will have to correct and repair very quickly their respective fiscal imbalances as well as the still continuously deteriorating competitiveness.

The ECB’s monetary policy in the eurozone was and will remain dedicated to its mandate of maintaining price stability, which is in the ECB’s view its necessary and central contribution that its monetary policy can make to fostering sustainable growth, job creation and financial stability.

The EU, under German leadership is asking and even pressing for a transfer union. It’s once again looking like the EU is putting together a dubious apparatus that it hopes should work, without any doubt “ineffectively,” someday in the future (far?). Unfortunately everybody seems to ignore the fire within the eurozone itself that is raging today.

The eurozone’s salvation does not lie with the ECB's monetization of the eurozone’s toxic debt but if the eurozone is to defeat the odds and truly come to grips with its debt crisis, then it should come to grips with its liquidity crisis. A more prominent role for the ECB would therefore be a desirable development as it would ostensibly allow for a step in the right direction. Let’s see what will come out of Thursday’s ECB Council meeting.

Seeing today’s optimism in many places, investors appear to be pinning their “hopes” on a short-term eurozone “bandage” that should be some kind of quantitative easing from the ECB.

But the ECB’s newly appointed president, Mario Draghi, didn’t seem to provide real support for their hopes when he stated last Thursday the crisis is purely a matter for governments and not for the ECB.

“Governments must – individually and collectively – restore their credibility vis-à-vis financial markets,” Draghi said.

“At the heart of these questions are not only the credibility of governments’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance … I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made … Whatever the approach, companies, markets and the citizens of Europe expect policy-makers to act decisively to resolve the crisis.”

German Chancellor Angela Merkel is calling on the eurozone to accept a “strict” regimen of “legally binding” budget discipline that should be enshrined in law, enforced by penal fines or otherwise, its very existence will probably lend itself to the probability of a renewed and even broader based crisis within but also outside the eurozone.

In my opinion, it all comes down to simple arithmetic where the eurozone “debt” numbers never didn’t, still don’t and will never add up as they should be under the EU treaty.

Yes, only a serious, sustainable and therefore trustworthy “fiscal” union will have the capacity to offer the eurozone a future vision of stability.

It could well be that if the European slowdown continues to gain traction, it could spread to the United States and other places in the world that could cause a second global recession.

If I’m right, long-term investors should still keep their investment powder dry and wait patiently for much lower prices before stepping back in. That doesn’t mean we couldn’t see a sympatric year-end rally in various markets. Of course I don’t have a crystal ball and could be wrong …

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Jürgen Stark, member of the Executive Board of the ECB, said solving the current EU sovereign debt crisis is primarily in the hands of governments. It s a fact the financial markets continue to have serious doubts about if the weaker eurozone countries will have the...
Monday, 05 December 2011 09:10 AM
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