The good news started with the ECB significantly expanding bailout procedures for eurozone countries struggling to raise funds from the market. Although it would be preferable for ECB funding to be utilised for the general eurozone economy as well as Government bonds, the recognition that previous guarantees were not enough is important. The ECB has finally recognised that it is always the lender of last resort for eurozone economies and is thus acting as a central bank on par with other central banks. This will reduce the urgency for governments such as the Greek Government to engage in austerity, although it naturally does not remove the requirement for structural changes to take place. In the process, it has also significantly reduced the immediate risk of Greece defaulting and leaving the eurozone in a disordered manner. This decision has given the eurozone time to breathe.
The next piece of good news came from the German Constitutional Court, which ruled that the permanent bailout system, the European Stability Mechanism, was legal within the German Basic Law. This removed a major concern, the ESM was impossible without the largest European economy funding it. A minor limitation was included, this being that any increases in funding from Germany requires approval by the Bundestag. With four of the five parties in the Bundestag pro-EU and likely to support any required increase, this limit currently seems unimportant. It is worth noting that if German public opinion moves too strongly against further bailouts, the parties may respond in withdrawing support as well, although that is currently a low priority issue as support broadly still exists for continued bailouts. The ESM allows for bailouts in the future to be given much quicker, removing lengthy delays, which had previously caused significant market concern. This is a far cry from the permanent and major fiscal transfers I discussed in my previous piece, which will be required if the eurozone continues on its path towards ever greater integration. It is however a starting point and demonstrates that no eurozone state will be allowed to reach a critical point again.
Finally, the Dutch voted in their General Election yesterday. The vote was an overwhelming victory for the pro-EU parties, especially the two major parties, the VVD and PdvA. One can only hope that this will be a turning point politically within the EU. Since the start of the global financial crisis, the European electorate has voted for radical parties in droves, presented little to no options for coalition formation across multiple elections and has generally shown doubt and confusion. The Dutch result suggests that, at least in this member state, confidence is returning in the European Union and in the traditional political and economic approaches.
The EU is not out of this crisis by any stretch of the imagination, but it seems reasonable to say that the news coming out this week suggests the end of the crisis is now in sight. The economic integration of the EU, especially the eurozone, was built with the good years in mind. We’re now close to a position where integration will be able to withstand bad years as well. Perhaps in future years, once growth has returned, we will see attempts made at dealing with the other problems discussed in my previous article.