[T]he basic problem with the premise of the EU Summit is that radical austerity is the answer — either that or face painful sanctions (in the spirit of the where countries like Greece, Portugal, Spain and Italy — perhaps even France — will end up seeing their debt ratios even higher as the denominator deflates (nominal GDP). There was nothing in this summit to discuss growth strategies as part of the solution, including ways to revive competiveness and reduce the long-standing imbalances in the eurozone that contributed to the current ever-lasting crisis. But the lack of emphasis on growth was a key omission here. Canada in the 1990s also faced tremendous fiscal austerity but also had the luxury of not only being in control of its currency and allowing it to depreciate so as to bolster export competitiveness, but a giant neighbour south of the border that ran huge trade deficits which Canadian producers could ride off of as well and thereby blunt the economic impact of the budgetary cuts and tax hikes at the time.
The European periphery has no such luxury — not in control over the currency — and Germany continues to run large-scale current account surpluses. An EU summit that would turn Germany into a consumer power as opposed to an export power would have been a big step in the right direction. In some sense, what we got was enforcement of the Growth & Stability Pact after eight years of dormancy, and some nifty announcements of more money being pledged to deal with the gargantuan sovereign debt rollover calendar that lies ahead but no real details of how this is going to be financed, and in the meantime, it is going to take months before all the machinery is put in place and all the details finally ironed out. We have seen this movie before — this is another Rocky sequel, not a new film.
Again, what we are seeing are incremental policy moves being taken, even if we are further along the road. At some point, there will be a resolution, but those that think we will not be talking about the need for even further action at some further summits are bound to be profoundly disappointing. All that happened on Friday was more in the way of buying time. In fact, while the ECB did not hint at QE, it was really the central bank meeting on Thursday that was the key for the week in terms of Draghi et al sharply bolstering liquidity conditions in the banking sector — the measures taken were truly unprecedented.