Over the past few weeks markets have risen and fallen, and we've seen numerous meetings and summits, and warnings from European institutions and political leaders. Have we made any progress? Sure, but it's been limited. Essentially what we have now is a world very clear on the fact that the European economy is in dire need of rescuing and that there's much work that needs to be done to resolve the crisis - at least that's further than we were this time last year.
The latest European Union meeting in Brussels focused on the idea of fiscal consolidation. That's important because a big part of the present problem is fiscal disunity - that is, each country is doing its own thing. It's a mess. Not only does each country have a different idea about how to resolve their budget dilemmas but have serious problems selling their ideas to the people. The Summit however resolved to make some uniform fiscal rules to promote some cohesion within the single currency block - cohesion that already exists within the framework of monetary policy.
Important progress was made last weekend in establishing rules that will help keep potentially rogue countries in-check. Rules that will mean that if a country goes beyond an acceptable fiscal or budget position, it will face penalties. This is a way of stabilising the region. After all, if all member countries are under the same monetary policy, there should be some uniformity with regard to fiscal policy. Unfortunately, Britain opted out of this latest agreement which has created its own political wave over in the UK.
European leaders are also currently trying to nut-out how to replace the current European Financial Stability Facility (short term fix) with the European Stability Mechanism (longer term solution). Both are designed to insulate or protect the Euro zone from a major economic shock. They are essentially bailout funds - in addition to monetary support from the European Central Bank and the IMF. Member states though still have to have their inclusion in the mechanism ratified by their parliaments, and generating investor interest from other countries is proving an enormous challenge (especially with China).
The other battle front is the attention member states are getting from the ratings agencies. Most countries are under the watchful eyes of Standard&Poor's, Moody's and Fitch Ratings. It's understood that there are likely to be several downgrades to come right across the Eurozone. The key for investors will be to watch what happens to the more financially solid countries like Germany and France. To put in bluntly, if France, Germany and Italy all lose their economic credibility, it's unlikely the euro will be able to survive and more likely we'll see a break-up of the entire region.
Resolving the European debt crisis remains a significant challenge. To quote a famous line from the American novel, The Great Gatsby: So we beat on, boats against the current, borne back ceaselessly into the past.
David Taylor
