Summer homework for EU leaders

Let’s start off with the postponement of the ESM. How big an impact will the lease have on Eurozone stability this summer?

The decision by the German constitutional court in Karlsruhe is quite a blow back to speeding the implementation of the ESM, now that the judgment will take place in September, and that of course increases uncertainty. Now what is amazing is that the Constitutional Court says that delay is not a problem because the money available would be enough to cover for Spain.

The problem with that argument is that any delay increases uncertainty and that would make a programme for Italy even more likely. If that was to happen we would still be rather naked an market pressure would continue to increase. So the justification is a bit odd. Having said this, the fact that we now have two months for the CC to make up its mind may also give the opportunity to the German establishment to reflect about what Germany wants in the medium term and in the next couple of years with the euro and with the EU and at the end of the day also make a decision about what is the long term plan.

The EFSF will be propping up Spain for the time being but how big a concern still is Italy?

I’m in principle optimistic about the fundamentals and the external position of Italy which is not so bad. Of course the big problem in Italy is the rise in interest rates that ultimately will endanger Italian solvency which is not a matter of a couple of weeks. This is a slow-moving process and insolvency or the need to access finance will come only in the medium run. I’m a bit less concerned with the urgency in Italy. However if there is major problem with the banking system this would require much quicker action

How significant is the ECB’s u turn on write downs and senior bond holders?

I think the ECB’s decision to change its stance on senior bond holder’s investments has come as quite a surprise to many including the Italian, Irish and many other finance ministers. Now, this is a major shift in policy stands because it implies that in the case of liquidation of a bank senior bond holders really can pay their share in the restructuring and liquidation,. This increases the risks to senior bond holders and this has implications for the financing of banks all around Europe. Now, the question is what this implies for bank-based finance, the structure of the financial system in Europe and the way we deal with bank-based financial intermediation.

What are the immediate and long term tasks at hand for Europe looking forward?

In terms of the short term decision making we need to sort out the most urgent problems in the banking system and then think about what the long term is anchoring to help the banking system become stable again because at the moment the banking system is under pressure from all sides.

There is a short-term funding problem, there is a short-term uncertainty problem but there is also a long-term uncertainty about the future of the euro, the all policy set-up and banking sector involvement. All this is linked together. We need make up our minds about the long-term and at the same time address short-term urgencies.