Photo: Flickr / procsilas
We know how the crisis ends in the Eurozone: It ends with aggressive monetary easing combined with a scheme to share the fiscal burden and make transfers from rich countries to poor countries.It’s taking a long time getting there, however, thanks to politics. And this is totally understandable.
But progress is being made.
There was the recent Spanish bank bailout, and contrary to the initial market reaction, and the commentary from various pundits, Spain has NOT suddenly lost market access, just because it took outside funding for its banks. Not only is its stock market up nicely since then, its borrowing costs (after initially spiking post-bailout) have come back in. The yield on the Spanish 10-year is back down to 6.38%, well off its recent high of 7.28%, and lower than where it touched in late May.
Meanwhile, austerity is basically completely discredited. This week marked the first “stimulus” announcement in a long time, as leaders said they’d spend 130 billion EUR to boost growth. That’s a tiny amount in terms of the total Eurozone, but as Cullen Roche notes it’s a step in a direction that will work.
Also this week, the ECB did a new round of easing of collateral that it would accept from banks for liquidity, so in its own way, the ECB is doing its part.
The crisis still rages on… but the leaders of Europe are vaguely walking in the correct direction of more stimulus and more burden sharing.
It could all fall apart, of course. Just because leaders are starting to go in the right direction, it doesn’t mean the people of Europe are… and the longer the depression goes on, the less likely voters will be inclined to support pro-Euro governments. There are multiple forces going in different direction, and it’s not clear which one will win.
But combine all of the above (perhaps not coincidentally in timing) with the fact that the German economy is starting to creak, thus creating more pressure on Germany to act and stimulate, and it’s possible to see more progress being made.