According to the technical definition of two straight quarters of contracting GDP, the Eurozone recession is over. It only takes one positive or even flat quarter to end a recession according to economists, which is in and of itself an excellent reason to change the definition. Technically, the recession is over, but in reality it continues as payrolls and incomes continue to contract.
The recession seems to linger on in the second and third largest Eurozone economies:
Neither of these countries is close to experiencing the robust economic growth necessary for them to fix their government budgets. If the sovereign bond market suffers a reversal, the periphery, and perhaps even France, will not be able to finance themselves in markets.
The Germans have been doing very well for themselves since former Chancellor Gerhard Schroeder pushed through a series of unpopular labor reforms. Of course, the people ended Schroeder’s political career as a punishment, and his predecessor Angela Merkel has taken the credit for Germany’s recent good fortune.
Germans want everything to remain the same. They have a much weaker currency than they should thanks to the periphery, which inflates export business and employment. While Germany enjoys using the Eurozone to sell its wares, the country refuses to share the wealth with its partners running a huge trade surplus with the rest of the eurozone. It also does not wish to share the wealth through transfers.
Germany better wise up. Since the greatest benefits of the common currency inure to Germany, it also has the most to lose. A Eurozone breakup would be absolutely devastating, which is why it has taken on Greece as a permanent ward. While it can afford a few billion euro a year to keep Greece in depression but within the Euro, Spain and Italy could not be bought off so easily. Germany better formulate a new eurocrisis fighting strategy soon, because intrigue will rise following elections.
There is no banking union but merely some bureaucratic busywork to create the perception that the EU is attempting to solve the eurocrisis. Last winter, we posted the six essential ingredients for a banking union, Cosmetic, Can-Kicking Banking Union Agreement in Play . Let’s check the EU’s progress on each of the points:
- A joint depository insurance scheme. Germany and the rich countries will not become joint and severally liable for the periphery’s zombie banks under any circumstances. As long as depository insurance is different among the countries, depositors will continue to shun PIIGs banks. For live examples of the consequences of this policy, please see Cyprus.
- Mandatory participation by all banks. Only 150 large, systematically important banks will be supervised by the ECB. The remaining 6,000 will be continue being supervised by their host countries where they will be coddled and allowed to survive even if they become unhealthy, due to political pressure.
- A set of rules applicable to all the banks. If there is anything that bureaucrats love to do, it is writing rules. I am fairly confident that the ECB will promulgate a set of regulations that may not necessarily be enforced due to political pressure.
- An implementation schedule. The banking union has been pushed back from early 2013, to the summer of 2013, to early 2014 and finally September, 2014. I see one more delay making early 2015 a more plausible roll-out date.
- A way to legally allow countries outside the eurozone to participate in an ECB-led banking union. This has yet to be achieved.
- A plan to deal with banks that are already in trouble or have been bailed out; i.e. resolution authority. Again, the rich countries are not even remotely inclined to become joint and severally liable for the PIIGs banks; therefore, the Eurozone will continue to have several different banking systems dependent on the fiscal and economic health of the host country.
In conclusion, the Eurozone has achieved two of the six perquisites for a banking union, which means that you may have another can kick here, but you don’t have a true banking union.
The Morgan Stanley CEO is a master of the obvious. The odds of a full-blown financial crisis are always near zero, but that does not mean that you can predict that one will not happen. The odds of a major earthquake hitting San Francisco are close to zero, too, but that does not mean that one will not occur.