Developed Europe: Economic Review 3rd Quarter 2012

November 9, 2012

In another encouraging development, European leaders have agreed to establish a new supervisor for Euro-zone banks by next year. The move will make it possible for the ESM to inject capital directly into the currency bloc’s banks rather than through the individual governments. This in turn is expected to help financially weak member countries that are not well-placed to support their banking systems.
Thomas White International

The majority of Euro-zone countries continue to be mired in a downturn.

Amid signs of a deepening economic slowdown in Developed Europe, three key events brought some cheer to the beleaguered region, raising hopes of a lasting solution to its debt crisis. In early September, the European Central Bank (ECB) announced its new Outright Monetary Transactions scheme, which is in effect a commitment by the ECB to buy unlimited quantities of sovereign bonds with up to three years in maturity, providing the bond-issuing member country agrees to a reform agenda. 

The plan came as a succor to large indebted economies like Spain and Italy, which have been struggling to control their cost of borrowing from the bond markets. Expectedly, the move steadied Spanish and Italian bond yields as well as renewed buying interest in global equity markets. 

Later, around mid-September, Germany’s Constitutional Court improved sentiment further by endorsing the Euro-zone’s permanent bailout fund or the European Stability Mechanism (ESM).  Germany is slated to contribute 27 percent of the ESM. As such, the country is required to ratify the proposal. However, about 37,000 people had petitioned Germany’s Constitutional Court against the ESM on the ground that the fund could mean unlimited German aid for Euro-zone members. The court pronounced that the ESM did not go against Germany’s constitution, but ruled that any increase in Germany’s obligation to the €500-billion ESM fund has to be ratified by its parliament. The ruling cleared the way for Germany to sign the ESM and make it a law for the Euro-zone.

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