Europe has cleared more key obstacles on the road to containing its sovereign debt crisis and stabilizing the eurozone after Germany’s constitutional court allowed a permanent bailout fund to go ahead.
Coupled with a European Central Bank (ECB) decision to buy short-term bonds of states that apply for assistance and abide by strict conditions, and with EU proposals for a single eurozone banking supervisor, the recent ruling clears the way for a concerted effort to draw a line under the crisis.
However, political risks still lurk on the path to repairing the flawed euro construct and Europe has yet to find a strategy to revive economic growth that would enable highly indebted states to reduce debt burdens and put the jobless back to work.
Among the bailed-out eurozone countries, Ireland is inching its way back towards the capital markets and Portugal is doggedly implementing a tough austerity program and has just been granted an extra year to achieve its fiscal targets.
“If you look at the ongoing few weeks, I would say we see a light at the end of the tunnel,” Finnish Europe Minister Alexander Stubb told reporters.
He cited last week’s ECB decision as well as the proposed banking union, the German court ruling and the fulfilled expectation of a pro-European result in Wednesday’s Dutch general election.
“If we get the next few weeks right we will have turned a corner,” Stubb said in a television interview.
An enthusiastic market reaction after the German ruling, with Spanish and Italian bonds rallying, shares rising and the euro hitting a four-month high, showed many investors believe the eurozone is finally starting to get on top of the crisis.
The next hurdle is Spain, where the country’s Prime Minister, Mariano Rajoy, is under strong pressure to apply for a limited assistance program that would allow the rescue fund to buy Spanish bonds upon issue and the ECB to intervene to bring down shorter-term borrowing costs, while keeping Spain in capital markets. Rajoy took another half-step this week by saying he was considering requesting ECB support and would not object to IMF involvement in monitoring Madrid’s public finances.
Whether for tactical reasons, out of national pride or fear of the political consequences, he is holding back on an application, possibly hoping to pass Oct. 21 regional elections and a late-October funding hump without outside aid.
Rajoy is resisting German pressure for tougher additional policy conditions to be attached to any rescue program, refusing to even consider cutting pensions, a key drag on Spanish finances.
If Spain tries to tough it out, its risk premium over safe haven German bonds could spike again as investors take fright.
BUYER OF LAST RESORT
With the ECB effectively declaring itself a buyer of last resort for troubled governments’ debt, provided they maintain fiscal discipline and implement economic reforms, predictions of a eurozone breakup have become less imminent.
Even New York University economist Nouriel Roubini, who has called the euro crisis a “slow motion trainwreck,” said the ECB had bought politicians time to fix the euro’s design faults.
Indeed the prophets of doom are now to be found more among the guardians of German central banking orthodoxy, who fear the strategy will lead to moral hazard, loose fiscal policy, inflation and eventually a collapse of the euro, than among Anglo-Saxon critics of the single currency.