We can all breathe a little easier today. The Europeans have moved up the permanent “fix” to the Euro crisis to July 2012. Whew! And we thought they were behind the curve (sarcasm off). Bloomberg is reporting that the EMU leaders have decided to push the ESM’s introduction up to July 2012:
“European governments are exploring speeding the setup of a permanent rescue fund as the urgency mounts to halt the debt crisis, an internal working paper shows.
Drawing on paid-in capital, the fund will wield a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.
Senior finance officials next week will examine the cost advantages of creating the fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings and obtained by Bloomberg News.”
Interesting. But inconsequential. The ESM, like the EFSF is fatally flawed as it doesn’t resolve the inherent flaw in the currency union. The ESM is a reactive fix to problems and not the proactive fix that the Euro needs. For instance, in the USA, the states are given an allotted disbursement from the Federal government each year. This helps fill any budget gaps that might be caused by a state’s funding deficiencies. And the USA does this every single year and even at times when Congress decides it to be appropriate. It’s a proactive measure. A way of saying – “bring it on bond vigilantes because we are a union of 50 strong and if you try to bring one of us down we will unleash the wrath of the other 49 on you via fiscal disbursement!”. The vigilantes understand this message and they stay in their corners like good dogs should. Like it or not, Europe needs the same sort of mechanism. I am not sure how they’ll finally come up with it, but it’s the endgame here….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.