Photo: Flickr/Mouser NerdBot
Morgan Stanley’s Joachim Fels has a nice, succinct explanation of why Europe made a positive step last week at its EU summit.Note that it came out a few hours before Italy was trounced in the EU finals.
Even though it might be tempting to open this Start with yet another football analogy, especially after Italy so convincingly ejected Germany from Euro 2012, I refrain from it today. Why? Because in contrast to the semi-final in Warsaw, there were no losers at the EU summit in Brussels – only winners. And I’m not being cynical here, I mean it! By agreeing to create a single banking supervisory mechanism run by the ECB and, once that’s done, allow the ESM to inject capital into banks directly, Europe’s leaders took an important step towards breaking the negative feedback loop between banks and weak sovereigns and progressing towards a more federal Europe. To be sure, it’s only a stepping stone, not a milestone, because the debate about the ‘if, how and when’ of a fiscal union is far from resolved and will likely intensify in the coming months. Still, couching it in terms of our scenarios for the euro area, the summit outcome makes me more confident that the euro area is not headed for ‘divorce’ but will rather keep ‘staggering on’ (which has been our main scenario from the start) and may eventually even end up in the ‘European Renaissance’ quadrant defined by both economic rebalancing and fiscal union. Fingers crossed.
The question now is one of momentum.
The next EU Summit is in October, and more concrete discussions about fiscal unions and so forth are expected to happen then. If the inermening time is seen as being positive towards that summit then good. If everyone goes back to fighting, then this “stepping stone” will be nothing.