The markets responded with (cautious) optimism to the announcements. Germany’s DAX rose 4.33% higher, France’s CAC increased 4.75%, while London’s FTSE 100 ended 1.4% higher. Spain, Italy and Greece’s markets also responded positively, suggesting they see hope for their countries in the new measures. Madrid’s IBEX index rose 5.66% to its highest level for two years, Milan’s FTSE MIB rose by 6.59% and Greece’s Athex index of leading shares rose 5.63%.
The agreement went further than most had expected. The German’s have won some concessions: a single supervisory authority will be set up for the European banks, replacing the current 17. It will be centred on the European Central Bank, by the end of the year. But the key demands of France, Spain and Italy have been met. The European Stability Mechanism, coming into being next month, will have the ability to lend directly to banks, rather than to governments- only last week, the German Chancellor had insisted she would never contemplate allowing this. This will mean bailouts can occur without hugely increasingly the debt of individual governments. The European Stability Mechanism (ESM) will lose “seniority” (preferred) status as creditor. This should remove a serious deterrent for investors to buy Spanish government bonds- investors had feared they would take the first losses in any debt restructuring. The ESM will gain the ability to buy Eurozone bonds at auction and in the open market, which is expected to bring borrowing costs down.
Meanwhile, as much as €500bn of new money is now available, on top of the €100bn already pledged for Spain’s banks, and a €10bn bailout for Cyprus. In future, countries in need of a bailout will not have to accept such stringent austerity mechanisms. However, those countries already in such programs have not been given a way out, yet. Ireland, which would soon need another bailout, could well be the biggest beneficiary. For countries in need of a bailout in the future, the ESM will be able to buy bonds from that country instead. This means, of course, that taxpayers across Europe will be in effect paying (something Angela Merkel seems to deny). This is why the measure were opposed for so long by countries in good financial shape- Germany, the Netherlands and Finland.
If the European single currency is going to work, it needs the same mechanisms that any other modern economy takes for granted. This means a banking union and a fiscal union, effectively guaranteeing some sort of unified monetary and fiscal policy. To legitimise such policies, Europe is also going to need some sort of political union, and serious democratic reform. The Eurozone remains very far from reaching these aims, but it has now taken its first tentative steps. And, although most of Europe remains locked into severe austerity programs, damaging any hope of economic recovery and locking the continent into depression, this deal surely represents the first glimmer of hope. After months of fruitless negotiations, we finally have a breakthrough. For that, we should all thank François Hollande.
Other Honorary Mentions this week:
Supreme Court Chief Justice John Roberts: An arch-Conservative since the 1980s, this week he surprised commentators with his vote on President Obama’s Affordable Healthcare Act. He voted with the liberal wing, arguing that the single mandate could be constitutional as long as it was viewed as a tax. In voting against his ideological beliefs, but in line with his understanding of the constitution, Justice John Roberts did much to restore the reputation of the Supreme Court as a non-partisan body.
Voyager-1: This week became the first man-made object to leave the solar system.
Chinese Astronauts: Three Chinese astronauts, including China’s first female in space, Liu Yang, returned to earth after a 13 day mission. Developing countries like China are now pushing ahead with investment into space programs as Europe and America fall behind.
Villain of the Week: Bob Diamond
The Libor scandal in Barclays and other banks is only the latest scandal. Chief Executive Bob Diamond (worth £105 million)has been a serial offender, previous occasions including a “multi-billion pound payment protection swindle”. It seems inconceivable the senior management, including Diamond, did not know about the rate-rigging. Between 2007 and 2009, the survival of the company depended on it; without it the company could have ended up as a nationalised bank like Northern Rock and RBS. If (astoundingly) he did not know, as he claims, then Diamond is incompetent beyond belief.
A £290m fine for the company goes nowhere far enough for a scandal that involved markets hundreds of billions of pounds. Bankers believe that the law does not apply to them, giving them perversely distorted incentives. This needs to change.