The politics of the EU summit appear quite tense, and as JPMorgan's CIO Michael Cembalest notes, you have to wonder if this is how monetary unions are made or broken: by strong-arming the Chancellor of the country primarily expected to fund the Euro’s survival. In order to better comprehend the shenanigans, Michael provides an aerial view of the summit and how these maneuvers played out. The next move is Germany’s.
The June 2012 EU Summit Maneuvers
The French Resistance to German austerity demands started with a threat by Hollande to surrender immediately, to not even support his own growth compact and to let the summit fail, unless Germany changed course. The growth compact was then agreed to. While it sounds good, no new monies were committed (the 120 bn Euros mentioned are from existing sources).
Italy switches sides: Prime Minister Monti, whose technocratic government was approved by Germany and who was expected to follow Germany’s austerity line, defected to Hollande’s camp and also threatened to allow talks to fail and blame the entire mess on Merkel. Sidenote: watch for a possible Napoleonic return from Berlusconi should conditions in Italy deteriorate.
Spain allied itself with Italy, and allowed Italy to attack Germany directly, since Spain’s banks and its entire economy are in much worse shape. Along with Italy, Spain is pushing for EU purchases of sovereign bonds with limited/no strings attached.
An isolated Germany retreated on its ESM lending stance and got little in return other than vague language about region-wide banking oversight by the ECB. Germany now has to sort out the internal politics of post-summit magazine covers showing an Italian kicking a soccer ball with Merkel’s head on it; a letter from 160 German economists criticizing Merkel’s approach at the summit; a comment by the German President that Merkel has the duty to describe in great detail what summit agreements mean for Germany’s budget; and France still reluctant to cede banking system or fiscal authority to an EU regulator, one of Germany’s demands.
Austria, Finland (inset) and the Netherlands, fiscally conservative allies of Germany, are dealt a blow by German concessions. Certain ESM provisions requiring 85% and 90% thresholds appear designed to thwart their potential objections.
Ireland sees itself as a big winner from the Hollande-Monti revolt, having argued since 2009 that the rich members should recapitalize EU banks directly, rather than each country being responsible for its own banks. Without any concessions from Germany, Ireland’s debt-GNP ratio would rise above 140%. Not clear if reality matches Irish expectations; perhaps Ireland will convince the EU to recap Allied Irish Bank and the Bank of Ireland with 15 billion (around 10% of Irish GNP).
After Great Britain vetoed the fiscal compact last year (which probably would not have applied to them anyway), it has been left on the sidelines politically, in “Splendid Isolation”. Given what is going on in Europe, not a bad place to be. The UK is not in great shape, but would be in disastrous shape had it joined the European Monetary Union.
Swiss wall of monetary neutrality under siege by capital inflows from the Periphery. Swiss National Bank FX reserves have grown by 40% of GDP since 2009, an enormous amount that China took over a decade to accumulate.
In a speech last November, Poland’s foreign minister stated that he may be the first to say he feared German inaction more than German action. On the other hand, he stressed the value of money, responsibility and the honest intention to repay as being the foundations of a moral order. Bottom line: Poland still wants to join the EMU, but is waiting for Germany to clean up the mess, and for the Periphery to adhere to new fiscal rules which would be “almost impossible to block”.