What Comes Next in Europe?

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"After Friday's mega rally, I look forward to some subdued trading this week. Today, as we digest what happened in Europe, the obvious question is, what comes next?"

After Friday's mega rally, I look forward to some subdued trading this week.

This usually occurs when a holiday falls on a Wednesday. Traders can't decide whether to take the long weekend up front or at the end.

So many take the whole week off.

Just as well, we could use some down time.

Today, as we digest what happened in Europe, the obvious question arises. What comes next?

For starters, the heads of state coming out of the Council of Europe meeting last week pledged to have the new structure by July 9, even though the new stabilization mechanism will take longer to phase in.

For the first time, there will be a greater accountability (and control) over continent-wide commercial banking and access to some underwriting of debt coverage. It also means that national banking systems will need to relinquish some oversight to the European Central Bank (ECB).

For months, a number of people (myself included) have insisted that the solution to the European mess requires greater financial integration. The shortcoming seemed rather straightforward.

The EU had ushered in a more centralized monetary system (single currency and all that) but had no centralized fiscal system to parallel it. Simply put, that required adherence to currency rules without any ability to coordinate the credit and fiduciary end of the spectrum.

Well what came out of the Council in the early hours of Friday will not solve the debt problem in Spain, Italy, Portugal, or Greece. There is no magic short -term fix. But it might just provide the underpinnings for a credit system that may begin to operate.

The banks are the problem right now.

They are short on liquidity, have insufficient reserves, and operate in a constricted interbank lending environment. Simply injecting new capital into the system will not address the problem.

Some banks need to fail.

But until the Council moved on Friday, no structure was in place to allow failures to occur without massive waves of panic. The Germans were correct that bailouts would not fix the problem.

Setting up a system of floated bonds would simply have required that taxpayer money in healthier nations Germany, France, the Netherlands, Austria, the Scandinavian countries would simply have been drained to address financial inabilities (or refusals) in weaker EU sisters.

We all seem to have relatives like that. You know, the ones who cannot get their financial act in order but know who to call when the rent comes due.

That was the shortcoming blown large in Europe.

Kent Moors
Oil & Energy Investor

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