Gap between what markets want and what politicians are doing has narrowed, Spiro says
Franco-German differences over how to revive growth is now biggest stumbling block to solving crisis
ECB has calmed bond markets, but fundamental issues remain unresolved and economic realities bleak
Editor’s Note: Nicholas Spiro is managing director of London-based Spiro Sovereign Strategy, a niche consultancy specializing in sovereign credit risk. Spiro advises private and institutional clients on qualitative aspects of sovereign risk, with a particular focus on Europe.
The eurozone is heading into 2013 in better shape than a year ago.
Greece is about to receive its latest tranche of aid as part of efforts to keep the country inside the 17-strong bloc. European leaders have taken the first concrete step towards a banking union by handing over direct supervision of many of the eurozone’s biggest banks to the European Central Bank (ECB). Even the latest political crisis in Italy has had a muted impact on the country’s bond market.
At the end of last year, it seemed like the eurozone was heading towards a disorderly break-up. Now, the sense among many investors is that the acute phase of the crisis is over and that the single currency area has turned a corner.
The gap between what the markets believe should be done to shore up the eurozone and what policymakers are actually doing to restore confidence has narrowed over the past several months.
Yet as the upshot of today’s end-of-year European summit in Brussels makes clear, rifts over the management of the eurozone crisis are still manifest. Important decisions on creating a fiscal and economic union to strengthen Europe’s shaky monetary alliance have been put off until June. This is primarily due to fundamental differences between the continent’s two largest economies: Germany and France.
Germany, which is holding a crucial parliamentary election in September – which Chancellor Angela Merkel’s ruling Christian Democrats (CDU) are expected to win – is resisting any form of debt mutualisation. France, meanwhile, is wary of surrendering sovereignty. Indeed, the two countries, which have been the motor of European integration, have never been more at odds over how to restore confidence and revive growth in the eurozone.
The standoff between France and Germany is now the biggest stumbling block to solving the eurozone crisis once and for all. Further delays in implementing key reforms raise the spectre of more bouts of market turmoil next year. It also begs the question whether creditor countries, led by Germany, will ever be willing to commit themselves to the level of integration needed to secure the future of the eurozone.
So, is next year going to be another turbulent one for Europe?
Quite possibly, but I see a crucial difference between the end of 2012 and the end of 2011: The ECB’s government bond-buying program, announced earlier this year. The Financial Times is right to name ECB president Mario Draghi its “Person of the Year.” If it wasn’t for Draghi’s July 26 pledge to “do whatever it takes to preserve the euro,” Europe would be in a much bigger mess right now.
The more positive mood among investors stems entirely from Draghi’s pledge to buy unlimited amounts of short-term Spanish and Italian debt as part of a bold plan to dispel fears that the eurozone will fall apart. It’s the “Draghi effect” that has convinced the markets that, despite all the problems in Europe, the nightmare scenario of a eurozone break-up is now much less likely to come true.
This is why I see Europe being a tale of two halves next year. The first-half is that the self-fulfilling panic in the bond markets which reared its ugly head again in July is unlikely to return. There will be bouts of nervousness centred around Spain and Italy in the coming weeks, but not as debilitating as was the case in November 2011.
The second-half is the bleak economic, political and social realities in the eurozone. The big issues of the crisis remain unresolved and are being kicked into the long grass. Draghi has done his bit to restore confidence. It’s now up to Europe’s political leaders to shore up the eurozone. Unfortunately, they still have a mountain to climb.
The opinions expressed in this commentary are solely those of Nicholas Spiro.