Draghi's Promise To Buy Bonds And The Agreement To Create The ESM Still May Not Be Enough To Eradicate Europe's Woes

Wednesday, September 19, 2012 07:08
Draghi's Promise To Buy Bonds And The Agreement To Create The ESM Still May Not Be Enough To Eradicate Europe's Woes

Tags: European crisis | European zone | world economy

Surprise, surprise, it turns out that Mario Draghi’s attempt to cement European financial chiefs together by getting the long-anticipated creation of the European Stability Mechanism (ESM) approved was much easier than actually bringing it to fruition.

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The fact remains that politicians still tend to act for the good of their home countries rather than the greater good of the European Union.
Greece is in the midst of holding off its obligations to comply with mandated spending cuts as long as it can and still receive aid. Spain is mulling whether to ask for aid, a mandate for bailout funds to be granted.
And Cypress is in fragile negotiations for a fifth bailout.
Meanwhile, Angela Merkel has the task of rallying an electorate that seems allergic to the very idea of bailouts. French president François Hollande is in dire need of a new growth model. And the self-imposed deadline of 2013 for the ESM’s creation is looming ever large.
Implementation of such drastic measures in the aftermath of such a wrangled process toward agreement cannot be expected to be easy.
And, fortunately, the revival of the ECB’s bond-buying program along with the agreement to create the ESM permanent bailout fund have bought European financial leaders some much needed time.
But the current calm is largely dependent upon Spain. If Spain doesn’t ask for a bailout soon, new doubts will arise quickly about its ability to remain solvent.
Spain’s prime minister Mariano Rajoy is delaying that request as long as possible in an effort to limit the conditions attached to another bailout package to minimize the political fallout from having to make unpopular cuts.
He is trying to placate Spain’s creditors by extending the retirement age, institute consumption taxes, and deregulate closed professions. If those measures do not work, Spain will be forced to ask for a bailout.
This could push Germany’s fragile and hard-won agreement to a teetering edge, causing the resulting German antagonism to put unwanted pressure on the ECB. If Spain does make the request, Italy would be the next focus and would be urged to request aid to avoid a so-called contagion effect of economic distress.
So, there is still much to watch on the European front. Let’s hope renewed turmoil can remain at bay long enough to get past the US presidential election and the resolution of the fiscal cliff, allowing the US economic recovery to get some legs.

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