A $125 billion plan to rescue Spain’s banks won’t solve Europe’s debt crisis or ease the pain of double digit unemployment across the continent.
So the plan unveiled Saturday eases pressure on the United States and the rest of the world economy as well.
The European rescue fund is now sizableabout 700 billionbut not as much as the US and IMF had urged, a problem that could be disastrous if Greece exits the euro zone.
Spain said it would ask the European Union forfinancial aid of up to 100 billion euros ($125 billion) for its ailing banks.
Far harder to calculate are the costs if, after Greek elections next Sunday, the new government reneges on the bailout Greece negotiated with its European lenders a few months ago.
Greece’s departure from the Eurozone would likely cause financial chaos across Europe: Greek debts would go from being denominated in sturdy euros to being denominated in Greek drachmas of dubious value.
At 11 percent, unemployment in the euro zone is at the highest level since the single currency was introduced in 1999.
What is more, the Spanish bailout will do little to address European banks’ addiction to the borrowed money they have depended on for their daily financing needs.
The fund would then use the money to strengthen the Spanish banks’ capital, their bulwark against loan losses.
“The way the currency union has been functioning is not sustainable,” Jens Weidmann, the president of the German Bundesbank, told the Welt am Sonntag newspaper.
“A breakup of the currency union would bring extremely high costs and risks that no one can really predict.”.
TOKYO, June 11 (Reuters) – Japan’s Nikkei share average isset to rise on Monday after euro zone finance ministers agreedon loans to Spain to help its battered banks, easing fearsEurope’s financial crisis would escalate.
Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank.
“Because the decisions to be made at, and immediately after, the forthcoming elections will determine the country’s future for at least the next decade.”.
That would likely cause far more pain for Europe than the financial messes in Greece, Portugal and Ireland.
When the market found out that weak Spanish banks used the money to buy its government debt, Spain’s relative recent calm was exposed as a sham, and turmoil followed.
On Sunday, Prime Minister Mariano Rajoy cautioned that the ailing Spanish economy, Europe’s fourth largest, which has had an unemployment rate of nearly 25 percent, would worsen before getting better.
COMCurrent DateTime: 12:15:22 11 Jun 2012LinksList Documentid: 22528753WorldPoliticsBusinessAnd it may not end there, with Italy struggling with economic stagnation and escalating borrowing costs.
A critical question will be how Saturday’s deal will be received by investors on Monday, particularly with the Greek elections approaching.
“By no means is this a solution,” said Adam Parker, chief United States equity strategist at Morgan Stanley.
The aid for Spain “could be a near term positive from a trading standpoint, but you haven’t solved anything in the long term.”.
The next task for European leaders is to show the rest of the world that they are making a credible effort to repair the flaws in the euro zone that allowed the problems in one small country, Greece, to threaten the world economy.
Greece spent most of their history in relative obscurity, having participated only twice in the final tournaments of the FIFA World Cup and the UEFA European Championship, in 1994 and 1980 respectively, until UEFA Euro 2004, when they became European champions in only their second participation in the tournament.
On June 28 and 29, European Union leaders will gather in Brussels to discuss, among other things, ways to forge closer fiscal integration.
Despite calls from some leaders for shared oversight of budgets and deficit spending, no concrete proposals have been made.
Even if Greece ends up with a government willing to try to live up to the terms of its 130 billion euro bailout deal by meeting its payments and striving to narrow its wide budget gap, strong doubts remain whether any new leadership in Athens can fulfill those obligations.
In Greece, voters could elect a government next week that will refuse to live up to the terms of the country’s $170 billion rescue package.
A lot of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country even deeper in the hole.
“Even in case of a new government, we doubt whether the institutional framework in Greece can guarantee the program,” said Jürgen Stark, a former member of the European Central Bank’s executive board.
Some euro zone countries are pushing for a European equivalent of America’s Federal Deposit Insurance Corporation, which guarantees deposits in US banks and manages bank bankruptcies.
In the past, the euro zone has done just enough to calm the market.
With Greeks about to go to the polls again this year and Spain securing its bailout before they do, the lines are being drawn for what could be a make or break week for the euro zone.
Although Berlin has been Greece’s harshest economic critic, Germans awoke last Thursday to find Angela Merkel, their chancellor, telling them on television that Europe needed a fiscal union—implying that some of their tax dollars may be needed to help the suffering Spaniards and Greeks.
More on CNBC.comCurrent DateTime: 12:15:23 11 Jun 2012LinksList Documentid: 47761186The ‘Spailout’ May Not Work: StiglitzMarkets Get a ‘Spailout’.
“We do not only need a monetary union, but we also need a so called fiscal union. This means that we also need a common budgetary policy, and we also need a political union.”.
Merkel quickly played down the prospect of a “big bang” solution coming from the gathering in Brussels—but Germans may be realizing that their own well being is in imminent danger.
This week official data will provide more clues about how the crisis is affecting Europe’s largest countries.
In remarks clearly designed to influence euro zone officials ahead of their weekend talks, he devoted much of his attention to Europe’s troubles.
Figures on industrial production in France and Italy are expected Monday and for the euro zone as a whole Wednesday.
Outside help is necessary, which could exhaust all the bailout money that the euro zone countries have recently put together.
The chart was based on national singles sales charts in 15 European countries: Austria, Belgium , Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom.
But slower growth in Germany could also create a political backlash, making Germans more reluctant to help their stricken fellow euro zone citizens.
“If people think they are poorer maybe they become more reluctant to share the burden,” said Clemens Fuest, economics professor at Oxford University.
Mr Fuest said he was skeptical that Europeans would ever agree to delegate control over their national budgets to a European authority as part of a fiscal union.
European leaders would be better off concentrating on measures that are more realistic, he said, like a common system for overseeing banks, guaranteeing deposits and dealing with sick financial institutions.
Other US guidance, such as advice on European bank stress tests, also wasn’t implemented as delivered, resulting in stress tests that failed to convince markets the banks were strong enough to withstand greater financial turmoil.
That could help avoid situations like those in Ireland, Cyprus or now Spain, where the cost of bank rescues raises doubts about the solvency of the national government.
The deterioration of Spain’s banks and the pressing need for a rescue was threatening to bankrupt its government.
Many proposals to push members of the European Union closer together would take years to carry out, too late to help ease current tensions.
The Maastricht Treaty established the European Union under its current name in 1993.
Mario Draghi, the president of the European Central Bank, said last week that it would help a lot if European leaders simply wrote a detailed plan for the future of the euro zone.
SINGAPORE, June 11 (Reuters) – Asian currencies surged onMonday, with the Malaysian ringgit climbing more than 1 percentat one point, as the euro zone’s agreement to lend Spain up to100 billion euros eased investors’ jitters about Europe’ssovereign debt crisis.
“The very fact of having an objective, a goal, an end point and a clear path would, by itself, contribute to a stabilization of the financial situation in Europe,” Mr Draghi said at a news conference.
How much time he and other leaders have to chart such a path may depend on what Greek voters decide.
“The Greek government, when one is formed, must send a clear signal that it is prepared to implement the reforms that have been agreed to,” Mr Weidmann, the Bundesbank president, told ARD on Sunday.
Moniqua Hope is a business journalist based in Hokkaido, Japan. Moniqua has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Moniqua spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.