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The cancer eating at the eurozone went into remission in Q4 2012, thanks to the outright monetary transaction programme that the ECB launched in August, and to the repeated promises by European heads of Government to set off down the – admittedly long and winding –`federal’ road to a complete cure. However, the European Council of 13/14 December 2012 carefully avoided momentous decisions that would have immediate effects – though it still agreed on a `roadmap’ that keeps the eurozone on track to much deeper political union beyond 2014.
Will that hesitancy to commit in the short term evaporate after the German Elections in September? Will France really come to terms with the need to pool economic sovereignty? What could trigger a market realisation that the euro area backed away from immediate actions for a permanent cure? Could tiny Cyprus really be “much worse” than Greece – as Eurogroup chairman Juncker put it?
The first milestone along the road to full economic and monetary union is the enactment of the 'two-pack’. This allows for enhanced economic surveillance and for national budgetary plans to be presented to the Commission for comment before they are enacted, and it is currently deadlocked between the co-legislators: Parliament and Council. Naturally enough, failure to reach even the first milestone would raise serious doubts in the minds of the bond market vigilantes about the depth of commitment to a genuine economic and monetary union. The failure to enact the `two-pack’ could begin to unravel the whole euro area project if it becomes apparent that the roadmap to a solution for the euro crisis actually leads nowhere. If that happened, the bond market would start to pick off the weaker members of the union.
...Probably the biggest challenge comes not from within the EU but from across the Atlantic where the struggle to avoid falling over the `fiscal cliff’ has mutated into a battle about the debt ceiling. Further, even if the econometric modellers try to ignore it, the unpleasant reality is that the bond markets have to be willing to buy the bonds that fund deficits and their purchase decisions are not based on how socially desirable the deficit may be.
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