Wednesday was a busy day in Europe. Perhaps most anticipated, the German constitutional court ruled against an injunction that would have halted the ratification process of the the eurozone’s permanent bailout facility, the European Stability Mechanism (ESM). (Incidentally, some interesting facts about the ESM here.) However, it did insist Germany maintain its effective veto on all the ESM’s decisions—in other words, it doesn’t want Germany’s liabilities to be increased without the country’s consent. Overall, the court’s ruling was largely in line with expectations and was comparable to its ruling on the EFSF last year.
For those in need of a brief refresher (we hardly blame you), the ESM is set to replace the temporary bailout fund, the European Financial Stability Facility (EFSF), though the latter’s funds will remain available until mid-2013. Germany is still conducting full legal review of the ESM and the eurozone fiscal compact, to be completed in December. But, all told, the ruling seemingly paves the way for the ESM to come online—and is another step along the eurozone’s meandering road toward a resolution to its now nearly three year old debt crisis.
But that’s not to say there aren’t still challenges—or that there won’t be more hiccups along the way. For one thing, Germany’s court included in its ruling the ESM won’t be allowed to borrow directly from the European Central Bank (ECB) because in the court’s estimation, “EU law doesn’t allow the central bank to buy government bonds on the secondary market with the intention of financing EU member state budgets independently of the capital markets.” In other words, and tied to other aspects of the ruling, the German court is attempting to ensure struggling nations’ governments aren’t able to get by without making much needed, though politically challenging, reforms.
We saw a similar caveat attached to ECB President Mario Draghi’s announcement last week the central bank was prepared to buy unlimited amounts of short-term government bonds to help keep interest rates reined in—but only provided those countries had already requested a bailout and were taking steps to comply with attached conditions (ostensibly, fiscal and political reforms).
Some saw the conditions on recent European concessions a likely source of future woe. But in reality, the countries in need of the various measures European officials have put forth are similarly in desperate need of reform. If they weren’t, wouldn’t much more of the European Union or at least the eurozone be in the same spot? But Germany’s not having the same debt problems Italy or Portugal or Greece or Spain have had. Neither is France, really. Why not? In our view, probably at least partly because they already have far more competitive economies capable of withstanding short-term dislocations. As opposed to a country like Greece that essentially folded when tougher global economic conditions reared their head.
Some also see continued nationalism as a threat to the overall monetary union, citing countries’ staunch and continued dedication to maintaining as much sovereignty as possible. And it’s true, even in something like today’s ruling, European countries seem pretty determined to maintain their sovereignty and avoid becoming a federation, more like America’s collection of states. Yet what would likely a couple years ago have been a non-starter is seemingly increasingly a topic of conversation—as evidenced by European Commission President José Manuel Barroso’s comments on Wednesday. Barroso noted to EU lawmakers, “We will need to move toward a federation of nation states. This is our political horizon. This is what must guide our work in the years to come.”
He also indicated the need for an overarching banking regulator—proposing much of that authority be vested in the ECB. Now, it’s worth pointing out he himself acknowledged it’s likely a transition that requires years, not months. And no doubt London will have much to say about the prospect of submitting its banks to ECB oversight and authority. But that a prominent pan-European official even uttered the words “federation of nation states” seems to us a noteworthy shift worth watching.
As ever, it’s most likely for now to provoke a new round of political upheaval, prognostication, trepidation and pontification. The important thing is not losing sight of the fact Europe’s taken some significant steps the past couple weeks toward putting in place the “bazooka” long sought by many in the media—but don’t expect the bloviating to stop anytime soon.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.