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Tuesday, May 11, 2010

The EU - Has The Fat Lady Started To Warm Up?

Yesterday I wrote about the euphoria that followed the EU bailout terms. Well, as Edmund Conway writing for the Telegraph says Shock and awe may not be enough to save Europe.  And as Mish writes, the important question at the moment is not the debate as to whether or not QE is a good idea, but whether or not the ECB can round up the votes to do it.  Already the Euro has given up 100% of its gains. Round trip currency moves of 3% each way, from 1.27 to 1.31 and back, in just over a day are not the norm to say the least. This could get very interesting soon enough.

And from Bloomberg: Money markets and the cost of protecting bank bonds from losses show investors are concerned Europe’s almost $1 trillion rescue plan may not be enough to contain the region’s sovereign debt crisis.

From the Telegraph:

This is a big moment for Europe and for the single currency. The events of the past 24 hours are quite likely to sound the starting gun either towards a more federal Europe or, just as feasibly, to the break-up of the euro – so high are the stakes. We’ve covered the full run-down of what has been decided elsewhere, so here are a few thoughts:

The European finance ministers are attempting to emulate the G20 summit in London back in April 2009, and to give the impression of throwing a massive amount of cash at the problem.

The provenance of the actual money is questionable. There are two plans under consideration here: 1. An extension of an already existing fund which was already used to help Latvia, Hungary and others by Eur60bn. 2. A far bigger plan to pledge around Eur 440bn of bilateral loans from eurozone members to support each. However, there is very little detail at all on where the money would come from, and the detail we do have is slightly suspicious (for instance, the fact that the euro members need to set up Special Purpose Vehicle to do this is not at all encouraging). The IMF has also apparently pledged to provide a further slug of cash – up to Eur250bn – and this money, should it actually arrive, is more solid. The first segment will affect the UK, but Britain, as a non-member of the euro, can opt out of the second.

This (bigger) plan is nowhere near approved by euro area governments. It involves significant further integration, so is very unlikely legally to be able to be pushed through without the approval of EU members. Given the no votes to the EU constitution from France and the Netherlands (and Angela Merkel’s defeat in the Bundesrat elections), can we really be assured of getting this approval? Moreover, there is big potential for legal challenges to the plan. The IMF will also have to approve the disimbursement, and one should not take that for granted either.

The ECB has started its QE journey on the worst footing imaginable, appearing to be forced into taking the decision, rather than doing it off its own back. This is distressing, since the decision to actually engage in QE is the right one. But then there are also doubts about precisely how the scheme will work: we don’t know anything about the total amount; we are told that the scheme will be sterilised (meaning it won’t actually be true QE (printing money)) but not how.

My impression is that there are likely to be severe challenges – both legally, constitutionally and politically – to the eur440bn European Stabilization Fund in the coming days as lawyers and investors tease it apart.

Finally, the most amusing thing, to me, is the idea that these measures will help clamp down on the “wolfpack” of speculators baying around the wreckage of the euro area. If anything, they are rather likely to make billions for the speculators, who will have made a killing on the big increases in equity prices today, and will make another killing when (as I suspect will happen before too long) there is another dip as the questions above start to become discussed more widely.

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