Win-win moment in Europe takes edge off summer of gloomy predictions

Ugly eurozone-crisis dynamics threaten to make it a summer of social unrest. But Spain's Euro2012 win and Germany's agreement on a European rescue fund have shifted the tone.

 Europe moves into summer on a more affirmative note after an EU decision to pull Italy and Spain from the brink,  and after a remarkable victory by Spain in the Euro 2012 games Sunday that restored national pride just when it was at an ebb.

Ugly euro-crisis dynamics threaten to make it a summer of gnashing teeth and social unrest, especially on Europe’s southern tier, where unemployment among youth averages 40 percent.

And now with an audit in France showing that President François Hollande must find $40 billion in austerity cuts in the next 18 months, it is hardly business as usual on the Continent during vacation.

But spirits lifted almost in surprise after Germany’s chancellor Angela Merkel made concessions from her austerity-only approach last week, and streets in Madrid turned ecstatic after the Spanish team won its third straight international match, something never done before.

For the first time in the euro crisis, analysts are talking “win-win,” however qualified.

The June 29 EU meeting seemed ready to fail but ended on high note, albeit qualified, after Mrs. Merkel, in concert with Italian Prime Minister Mario Monti, agreed to allow a $650 billion European rescue fund to buy bank debt and stop the “contagion” of market speculation that was engulfing Italy and Spain. (On cue, Italy’s soccer team promptly beat the Germans in the Euro 2012 semi-finals.)

The effect of the decision brought immediate rejoicing in Ireland, which has a surfeit of bank debt pulling down its economy;  sighs of relief were heard in many European capitals.  

“The principle of a direct recapitalization of banks by the European Stability Mechanism without increasing the sovereign debt of a country is a significant advance,” says Thibault Mercier, economist at BNP Paribas in Paris, “and it is useful for Spain, which faces potentially as much as 100 billion euros of bank recapitalization.”

“The political tempo of the European construction is very slow,” Mr. Mercier continued, “and what was achieved in the last few months was quick, even if it seemed too slow for the markets and for investors.”

Is the euro crisis over?

Hardly.

France faces cuts

In France, Mr. Hollande, fresh from coordinating a good-vibe “growth pact” for the EU last week, and from bringing a fundamental new shift in European dynamics by backing  Italian Prime Minister Monti’s plan to avert collapse – now himself must make heavy austerity cuts at home, and find some $12 billion in new revenue.

Hollande won the French presidency, and his Socialist Party won both houses of parliament in late spring on a rally cry of “growth.”

But it has been long understood in the Elysees Palace that cuts were needed to avert the very kind of market disruptions that sent Greece, Ireland, Portugal, and now Spain and Italy into uncharted waters.

Since 2010, Greece, Ireland, and Portugal have taken some $240 billion in bailout funds, and French debt-to GDP rates are at a worrying figure of near 90 percent.

Knowledgeable French sources say Hollande will achieve much of this goal by not replacing civil servants and government employees. Some 24 percent of French working population is paid by the state, and Hollande will reportedly not replace a quarter of those retiring.

A previous plan by former president Nicolas Sarkozy would have avoided replacing 1 of 2 retirees. Hollande hopes to split the difference, with the exception of the teaching and police ranks.

Hollande emerged from his first EU summit with some success toward a growth policy and a sense that he had politically moved toward “rebalancing” Europe by aligning with Italy and Spain against the austerity orthodoxy of Germany that has set the pathway and solutions for Europe during two years of debt and banking crisis.

The “win-win” in Brussels for Merkel is that she averted the hated idea of mutual or common debt in Europe that would be symbolized by issuing euro bonds; Merkel also kept direct supervision of banking rules.

Der Spiegel opined on the weekend that Merkel managed to sell Hollande a growth pact that mainly relied on unused EU project funds and “won’t cost Germany a cent.”

New York Times columnist and Nobel economist Paul Krugman, in a piece titled "Europe's Great Illusion," argues the concessions made by Merkel are "tiny compared with the scale of the problems."

Speaking of the measured uptick in spirit, Cedric Thellier, a eurozone specialist at Natixis in Paris, comments that, "I don't know if this positive feeling will hold … all summer long because you have to get a concrete follow up. But this…seems a more positive summit that the previous ones for Europe… because of the consensus… and the breakthrough. France gave up some ground on the eurobonds and Germany did the same with the banking union, provided it is controlled by a trusted supervisor like the ECB [European Central Bank].”