Evercore Pan Asset

The EU summit on Friday 4th February passed off with surprisingly little drama. The EU nations for once decided to avoid interesting public rows on the future of the Euro. The two big items discussed were energy and innovation, topics which did not set the pulses racing. There had to be a diversion to talk about Egypt, though few think the EU’s views on the politics of that country will have much impact on anyone. 
 
Beneath the surface there are important things happening. The EU has settled on a strategy for propping the Euro, forged in the furnace of market crises affecting Ireland and Greece. The Summit confirmed that there will be new “ambitious” stress tests for all EU regulated banks. This becomes a problem when we get nearer to seeing the results. The Commission reminded Member states that they are all signed up for the new EU semester. 
 
Under this new regime Member states have to submit their budget and economic plans to the EU by April for vetting. In July the EU will offer its guidance and advice to states as to how their economic policies should be developed or amended. In the bureaucratic prose of the EU, “Building on the new economic governance framework, Heads of State or government will take further steps to achieve a new high quality of economic policy co-ordination in the Euro area to improve competitiveness, thereby leading to a high degree of convergence…”
 
In other words, in future, member states will be under more pressure to curb deficits and control borrowings. The Stability and Growth Pact will be toughened.  Member states could face fines as well as censure for poor performance. The EU will take powers to strengthen its control over member states economies, and will amend the Treaty to allow a larger and firmer Stability fund for Euro members. 
 
All of this is taking time. For the moment markets are prepared to live with the delays and the uncertainties. The direction of travel is towards more centralised control over borrowings and budgets. The banks remain in some cases very weak. Time will tell how stressful the new stress tests will be and how quickly action will be taken to buttress their capital. The Stabilisation Fund remains under the old rules and difficulties until 2013, but could be beefed up in a crisis. 
 
Markets are taking heart from the strong performance of the core Euroland economy, benefitting from the competitiveness of German industry. They should not ignore the unfinished business in peripheral Euroland. Ireland and Greece will struggle to pay their debts, growth remains disappointing outside the core, and some of the banks need treatment.  The summit looked forward to a new world where the EU cuts its carbon emission by more than 80% by 2050, and leads the world in various innovative areas. Meanwhile, we still have a two speed Europe, and parts of Europe are still too heavily in debt and deficit. The issue over whether bondholders or taxpayers pay for more of the past errors is still not fully worked out. The EU model remains bureaucratic and regulatory, which limits the ability of the area to respond strongly to Asian competition.

As published in Investment Week