Despite the negative nabobs about the deal reached in Europe, the reality is the deal is yet another positive step in the right direction for the European debt issue. In fact, if I might go out on a limb, it is a decisive step. Yes, much more work and pain will come, but the unification of 26 countries under the new rules will breed market confidence. True, the new rules still require negotiation, but in the meantime, the ECB can begin its backdoor program of shoring up banks, which, in reality, is the main underlying concern of the market – the fear of 2008 repeating, meaning, a massive drying up of liquidity.
But French President Nicolas Sarkozy told reporters the ECB’s move to provide unlimited three-year funds to cash-starved European banks would be more effective, by enabling them to continue buying government bonds.
The agreement reached in Europe today allows the above to go forward, which will help with market confidence as well, and that will spill over to business and consumer confidence in Europe eventually. As usual, though, politics is the unstated villain in the process, but as I am loathe to admit, sometimes politics is necessary to get the job done.
A month into his term, European Central Bank president Draghi is being careful not to alienate Bundesbank chief Jens Weidmann, a vocal opponent of the ECB’s bond purchases. Draghi needs to keep Germany’s central banker onside to expand the ECB’s crisis-fighting role.
So, yes, the deal reached is good, but the debt problems still exist, and those will take some time and money to fix. Given the delicate political situation mentioned above, the ECB will have to move slowly, but it will move. The deal has bought time for the debtors and the ECB, and, more importantly, it has created an avenue for newly printed money to flow to banks. Look back to the first quote above and note the word, “unlimited.” This is the key.
I am not under any allusion that the European deal will remove the volatility from the market. Moving through the long process of unification and debt resolution will cause fits and starts. However, as I have been saying for some time, the unification of Europe under a stronger political framework is necessary to both resolve the current debt problems and to allow Europe to become a fundamentally solid economic player without all the internecine politics that have held it back in this recent crisis.
I am sure both the market and I will have plenty to say about Europe as the days, weeks, and months roll on by, but this step today could make room for the market to start looking toward economic fundamentals, which should improve if investors, consumers, and business regain confidence in Europe. After all, don’t forget, the EU is the largest economy in the world.
Although subject to its own fits and starts, the beleaguered housing market is trying to move out of its hole.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, spiked 12.8 percent in the week Dec 2. The MBA’s seasonally adjusted index of refinancing applications also jumped, gaining 15.3 percent, while the gauge of loan requests for home purchases rose 8.3 percent.
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