Mar 28 2012
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Are we at the end of the Eurozone crisis?
Central bankers and politicians have a fairly good track record of declaring victory too early only to have to back-track later on. Remember when Bernanke mentioned the "green shoots" of recovery in 2010 only to have to resort to more QE later that year?
Bernanke is not making that mistake again in 2012. Instead, rather than show any sign of optimism on the back of the pick-up in US economic data he is being overly pessimistic by saying that economic risks remain high, the jobless rate could reverse some of its recent gains and that the central bank needs to continue to provide monetary accommodation to ensure a smooth recovery going forward.
Perhaps Monti didn't realise what is glaringly obvious to everyone else: he is contradicting himself completely. There are two things needed to bring the sovereign debt crisis to an end. Firstly, it is an enhanced, super-duper rescue fund to convince investors that if another country gets into financial trouble in the currency bloc there is a cushion of money readily available to break their fall. Some people believe this needs to be many trillions of euro due to the extent of debts in Greece, Spain and Italy - the world's third largest debtor. However, plans to increase the rescue fund that are currently being discussed only want to increase the fund to EUR 900 billion, however that includes the bailouts already given to Greece, Ireland and Portugal, which reduces the fund to EUR 700 billion.
Structural economic reform is the second part of the solution. This is also proving to be much harder to implement than some originally thought. European economies need to become more competitive, wages need to fall and public services need to be scaled back to wean Eurozone economies off unsustainable budget deficits and reliance on public debt to fund welfare states. Europe doesn't have huge oil revenues coming in like parts of the Middle East, likewise, apart from Germany, it's not a big exporter.
We have seen how hard these reforms can be to implement. Crippling national strikes have brought Greece and Portugal to a halt in recent months, the new Prime Minister of Spain gets his first taste of a national strike on the day before he presents his country's Budget. The risk is that politicians need to win over an electorate and so will go easy on fiscal reforms which could spark fear in bond markets and another wave of the sovereign debt crisis further down the line.
Thus, it was with some relief that former ECB board member Lorenzo Bini Smaghi (also an Italian) spoke some sense and said that the crisis is still very much alive during a recent interview with CNBC.
So why would Monti be so upbeat? It's no surprise that Monti spoke these comments in Japan and China, they have the cash surpluses in the form of FX reserves that could be invested in Europe's bond markets to try and ease sovereign strains in the long-term. To entice that investment Monti has to talk up the progress made in Europe.
It's likely that a mission is probably on its way to the Middle East now to see if there is any interest in European investments, especially now that the IMF seems less willing to throw money at supporting the currency bloc. However, the sovereign crisis is going to take many years to work through, and we need to see reforms working before anyone, even Monti, can declare that the Eurozone crisis is close to being over. The only thing we know with any certainty is that we are not even close to the finish line yet.
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