Pip, Pip, Cheerio! We’re Out!

With the European economic summit now ended, I thought it might be useful to bullet-point the outcomes; to the extent they are understandable.

  • There will be a new agreement for better economic integration in the euro zone.
  • The new treaty could take up to three months to negotiate, and may require referendums in certain countries.
  • The new treaty would include automatic sanctions for countries exceeding stated deficit restrictions.
  • The European Central Bank (ECB) will cap the amount of its euro zone government bond purchases at 20 billion euro per week.
  • The ECB will provide unlimited 3-year funds to European banks, reducing the odds of liquidity induced bank failures and providing funds for those banks to buy government bonds.
  • Surprisingly, the European Stability Mechanism was held at 500 billion euro, much less than the expectations leading into the summit.
  • 9 of 10 countries that do not use the euro agreed to negotiate a new agreement alongside the new EU treaty, subject to parliamentary approval.
  • Britain refused to agree to the new treaty idea, since it did not include guarantees to protect its financial services industry.
  • Finland calls this agreement “The beginning of the beginning of the end of the crisis.”

Our takeaway from the summit…

  • The biggest positive for the near-term is the 3-year bank funding provided by the ECB.  Preventing a major bank failure is Job One in avoiding a contagious financial crisis.
  • The overall plan seems nebulous and subject to referendums and parliamentary approvals in countries where that may not be possible (ie. Ireland).
  • The treaty, should it come to pass, represents an historical surrender of sovereignty on the part of the 17 member countries, and could lead to increased social unrest in those countries that are sanctioned in the future.
  • Britain has taken a huge risk by isolating itself against the other 26 countries involved in this agreement.  50% of its economy is transacted with the EU, and the decision to vote “no” removes Britain from having any formal say in the details of the treaty.
  • We remain skeptical that this will end up being a significant event in terms of ending the crisis.  The bond market seems to agree, with Italian 10-year bonds still trading above 6.5%.