Eurozone Crisis Part 2; the Art of Muddling Through & Markets

The World

Waiting for a Concrete Response

As the EMU came up with an agreement over a second bailout for Greece nearly 3 weeks ago, politicians and bureaucrats hoped this would mark the end for the Eurozone crisis. Initially markets appeared confident again, until they actually went over the document.  Now, they are still fidgety concerned about Italy’s economic state, Spain’s prospects and soon for other Member States (Ireland and Portugal; wink-wink).  This exemplifies the problem with the EU’s preference muddling through the issues instead of addressing the underlying problems.

The EU as a whole has quite a record in muddling through; MS on occasion are able to exclude themselves from Treaty clauses, the Stability and Growth Pact did not and does not have an actual implementation mechanism, CAP negotiations over crucial cuts have been postponed for nearly a decade.  Striking an agreement with 15, 22 or 27 MS is not an easy task; the issues are far too many and overall the European project has fared well.  Nonetheless it is ultimately the lack of political will to deal with its problems that have allowed markets to make weird choices over the past 2 years.

Starting from last year when the effects of the crisis on Greece and other Southern states were being realized, the EMU held a series of meetings with the main powerhouses, Germany and France, disagreeing on solutions as markets went berserk.  After long prolongation, quite a lot of drama and late night coffees in Brussels; a bail out was decided.  There were little actual conditions regarding the implementation attached to it.  The plan was to limit the short term problems Greece was facing and posing to the rest of the EU.  Again markets were momentarily calmed but quickly and surely Greek spreads started rising again.  One year after, the story has repeated itself with more countries at bay, Ireland and Portugal counting already one bail out, a second bail out for Greece and more discussions over future steps.  The markets are not happy and with some reason.

Political talks are naturally intense in such cases; it would be comical if not detrimental for the EMU to reach agreements without deliberation, especially without the (partial) inclusion of representatives of the public.  However, the lack of concrete responses over issues such as the latest Greek bail out reduces investor confidence.  A more recent example is the absence of a plan in case Italy and/ or Spain require assistance.  All these plans (or their absence thereof) do not deal with long term problems of the EMU, they act as patches that maintain an equilibrium temporarily.  This might serve the election cycle but not the business cycle.  Though it is highly unlikely the EMU would let these countries “sink” a straightforward answer beforehand would help considerably.  If politicians representing the “State” can’t stand up for the EMU markets are less likely to do so. 

Mr. Triche is right; markets should not consider countries such as Egypt or Tunisia as safer economic havens than Italy or Spain regardless of their economic problems for all the obvious reasons.  But markets will remain volatile and fidgety as long as E(M)U politicians do not step up and provide clear solutions with regards to the future of the Eurozone. 

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