According to leaked documents from the EU summit, there is indeed some hope for the euro-zone: the leaders are shifting their focus on growth and not on austerity. This is a good first step that helps the euro, but more needs to be done. The EU provided 3 positive decisions. Two more are missing, and they are at the hands of ECB.
Growth is the key to getting out of this mess. Without growth, the debt to GDP ratio just grows and the chances of standing back up on the feet are lower – a vicious cycle. Up to now, austerity medicine was prescribed. This medicine isn’t going away, but also some positive measures.
1) No more punishments First of all, the interest rates aren’t punitive anymore. 3.5% for new loans on Greece, as proposed) is more logical than 5.7% that was imposed on Ireland, and gives hope of eventually paying back.
2) Hope An even more important statement is a Marshall Plan for Greece – a big effort to rebuild the country. Statements are important, and actions need to follow.
3) Speed Another factor is speed: Up to now, the bailout programs arrived when the troubled countries lost access to the markets. We now hear that the bailout fund will be able to buy bonds in the secondary markets and avoid reaching a bailout in the first pace.
Such preemptive, speedy action, is the total opposite of the leaders up to now – a behavior of dragging their legs and reacting too little and too late. Allowing the EFSF to act in a timely manner is a good step forward.
The Missing Pieces
1) QE I expected the ECB to make the same moves, and deploying a massive quantitative easing program. This would not necessitate approvals in parliaments. This would be an even faster move to lower bond yields and help Italy and Spain with having access to the markets.
The euro mostly enjoyed the relief that no selective default was mentioned. Earlier in the day, there were talks that Jean-Claude Trichet retreated from his declarations of “no default, no selective default, no credit event”. This wasn’t seen in the leaked documents.
I believe that some kind of default is also necessary for Greece to be able to grow and recover, despite the contagion effects.
2) Lower rates Another pro-growth step, at least for the short term, is to lower the interest rates, which Trichet just hiked two weeks ago. Lower rates will help lending, exports and growth. Also here, no parliamentary approval is needed, just a different attitude in the stubborn central bank.
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