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In the absence of a sustainable solution in Europe, what’s the next temporary patch?In the latest version of Top Client Questions, SocGen’s Michala Marcussen wrote:
What can be done … quickly? The consensus is that the euro area will move to some form of fiscal and banking union or break-up. We continue to see full break-up as an extreme tail risk; we also believe that reaching a fiscal and banking union will take time. As such, we see additional rounds of the by now all too familiar pattern of market turmoil, a peek into the abyss, an additional policy patch, market relief rally, policymakers declaring the worst over … only subsequently to see turmoil return. In our opinion, the next policy patch is to give the ESM a banking licence, potentially double its fresh lending capacity to €1tn and allow the institution to recapitalise banks directly. This solution does not require a treaty change (although it needs to be ratified by national parliaments); nor does it place huge potential liabilities on Germany (and the other fiscally strong member states).