The most important positive element is the movement towards breaking the mutually destructive links between banks and sovereigns, writes Wolf in his FT column.
What makes the agreements seem potentially more significant than on face value, however, are that: first, there was actual progress towards a higher degree of integration; and, second, a coalition formed between France, Italy and Spain. The latter suggests that the political dynamic of the eurozone might have altered with the rise to power of François Hollande. It also seems to confirm that Germany does not wish to seem isolated, provided it does not have to concede on fundamental principles. However these shifts certainly do not show that the path to true fiscal or banking unions now lies open. Either would require a far greater sense of solidarity than now exists. For the reasons I advanced last week, I remain sceptical of the feasibility of agreeing such unions or of making them work, if they are agreed.
In substance, then, these are small steps, incapable of achieving the three necessary conditions for an end to the crisis: a definitive separation of banks from sovereigns; financing of weak sovereigns on manageable terms during the lengthy period of economic adjustment and retrenchment; and, above all, a return to healthy economic growth.
Let us not be too grudging: the decision to allow the ESM to recapitalise banks directly is possibly very important, both in itself and for what it portends. It might transform Ireland’s position. Nevertheless, the biggest danger is that the economics of the eurozone are deteriorating fast. Joblessness reached 11.1 per cent in May, the highest on record for the zone. Worse, apart from its refusal to intervene in sovereign debt markets on the needed scale, the ECB is hopelessly late in taking necessary monetary action. With austerity biting in vulnerable countries, everybody is feeling the pinch: even Germany is not immune to downturns in big trading partners. It is conceivable that the eurozone will struggle through this economic trench warfare over the next several years. However, the costs – not just economic but also political – are likely to be enormous.
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