Forget the gloom: Focus on growth
Monday, July 2, 2012/
After a series of failed summits, the European ministers have finally focused on growth rather than the fear of failure. The new Iron Lady, the German chancellor, Angela Merkel, softened her hard line on fiscal discipline and debt repayment to finally enable a breakthrough after 19 summits that failed.
Generally, leading companies can now get on with the business of business as the eurozone leaders have agreed to set up a supervisory system for their banks that will form the first step towards full banking union; scrap the requirement that governments get preferential status over private investors in the event of a default, ease the stiff terms for future bailouts.
The money could be used to buy bonds to drive down a country’s borrowing costs. Or it could be loaned directly to troubled banks, which could help break “the vicious cycle” in which weak banks and weak governments threaten to drag each other down, now that the focus will be on helping the banks rather than bailing out governments.
The EU also called for a single regulator — probably the European Central Bank — to oversee Europe’s banks. Currently, banks are regulated by their national governments and some countries have been slow to recognise loan problems and shut down their worst banks.
As part of a broad “banking union”, the new regulator will likely get power to close failing banks if their national regulators won’t do it. The plan also is expected to include deposit insurance across Europe. Individual European countries now insure bank deposits within their borders. But bank failures could overwhelm those national funds.
The benchmark stock index in Germany rose 4.3%, by far its best performance this year. Germany has the biggest economy in Europe, and a warm reaction there was a crucial sign of approval for the plan. Prices for oil and other commodities moved higher. The EU leaders defied low expectations by announcing plans to:
*? Bail out banks, without putting any financial burden on strapped governments.
*?Ease borrowing costs on Italy and Spain, the euro region’s third- and fourth-largest economies.
*?Seek stronger, centralised regulation to European banks.
*? Rescue floundering countries, without forcing them to make
painful budget cuts if they’ve already made economic reforms.
*?Tie their budgets, currency and governments more tightly.
As a sign of things to come, US President Barack Obama narrowly won support from the Supreme Court for his healthcare from the conservative Chief Justice John Roberts and the Dow Jones industrial average recorded one of its biggest gains of the year.
Stocks advanced even further in Europe — in strong and weak countries alike. The cost for the troubled government of Spain to borrow money on the bond market fell dramatically.
So now is the time for leading companies to forget the political gloom of the big new tax, the boats and the Eurozone and focus on growth.