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The Eurogroup provides a reality check

The last sentence of the European Council Communique from the June meeting simply states “We task the Eurogroup to implement these decisions by 9 July 2012.” This was always going to be a stretch and as expected the marathon 10 hour meeting of the 9th of July has failed to do any such thing as is clear from the Eurogroup communique.

As we discussed in detail in our report following the European Council, there were four important decisions taken that day. Some of these, such as the decision to set up a Eurozone-wide bank supervisor, the decision to allow Eurozone crisis funds to directly inject equity capital into troubled banks in member states got a lot of people excited. However, as we discuss in this commentary, the Eurogroup meeting provided a good reality check for those who may have got carried away after the better than expected (only because expectations were managed so low) results from the European Council meeting in June.

The Good Bad and Ugly from the European Council

The short but important conclusions from the all night summit of Euro area leaders can be found here.

First the good news, four very important decisions were taken 1) A decision to eventually hand the European Central Bank direct supervision of Eurozone banks 2) A decision to allow, in principle, the European Crisis funds the EFSF/ESM to directly inject equity into troubled banks 3) A decision to waive seniority or preferred creditor status that Member States had claimed for the ESM, for Spain’s rescue 4) An agreement to activate crisis support for Spain and Italy through the EFSF/ESM buying bonds in order to bring borrowing spreads down.

Then the bad news 1) The decision to giv

Yet Another European Council! Rescuing the Eurozone?

What is the outlook for this summit?

At the eve of what is now being unofficially billed as the summit to save the Euro, things are not looking good at all.

To put it mildly, no one is expecting miracles from this summit. It would be enough if they can avoid this being a disaster.

The political space is now much smaller and the size of the economic problem now much bigger than at the last such comprehensive summit in March 2011. Despite this, the summit will devote far too much time on a highly ambitious political integration agenda, much of which is unachievable in the near future and devote far too little time to tackling the growing economic problems, where action is urgently needed now.

The Spanish Bailout, the Eurocrisis & the myth of Seniority

The Spanish bailout has triggered a big ongoing debate on the issue of seniority for public creditors. Certain commentators and market actors claim that it is because the European Stability Mechanism (ESM) sees itself as a preferred creditor that the announcement of a Spanish bailout has led to rising spreads. They say that seniority means that once the ESM comes in, it reduces the effective claims of the private bondholders in the event of a restructuring.

This piece exposes the flaws in this thinking both in the general case and more particularly in the case of Spain. We conclude that if the EU wants to rescue Spain, the trick is not to remove seniority from the ESM but 1) to remove all uncertainties around the future of the Eurozone 2) make conditionality more growth friendly 3) channel the bailout directly to needy banks without going through the sovereign. 

Oui Nein & Non Ja - Franco-German fault lines & Eurocrisis

Whenever the future of the European Union was considered in the past, at least in the last couple of decades or so, a crucial fault line that always limited progress towards an 'ever closer union' was the critical differences between the French and German approaches to the European Project.

Germany favoured a stronger institutional structure with more co-ordination and a centralized decision-making structure, France a more decentralized construction where groups of national leaders were the ultimate decision-making authority and the transfer of sovereignty to the centre was rather limited. This same fault line is now once at the heart of the discussions surrounding the Eurocrisis and the ability of the two countries to bridge this will determine the shape of Europe, in particular the Eurozone!

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