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Increased European Central Bank Power

Will increased European Central Bank power help curb excessive spending and bring the continent’s finances back in line? European leaders met and seventeen nations agreed to treaty changes that will integrate national budgets, although Great Britain opted out. The European Union, envisioned in the dark days after World War II, is gradually moving towards stronger financial union and, hopefully, better fiscal responsibility. Part of the increased European Central Bank power will come from EU bailout funds now to be under ECB control. The news of a more fiscally sound European Union has generated enthusiasm for those investing in Euro Zone stocks as markets responded to the good news a deal among 17 EU members. Nevertheless interest rates of Italian bonds are edging up again, a sign of continued investor concern.

The need for treaty changes and increased European Central Bank power come from the so called “PIIGS” crisis. Over the last couple of years Portugal, Ireland, Italy, Greece, and Spain have been dealing with the possibility of default on their sovereign debt. In Greece, especially, the situation has been tense as calls for austerity measures have prompted street riots. Both the governments of Greece and Italy have fallen to be replaced with more financially prudent leaders. The situation in Greece has been such that many anticipate that the country will withdraw from the European Union and use the Drachma again. In fact, the services that provide counter party risk coverage for Forex trading have been running scenarios in anticipate of one or more nations leaving the European Union. As the European debt drama has played out, investors have chosen to buy European stock or sell European stocks depending upon the news of the day. A happy result of the new treaty changes and increased European Central Bank power will likely be a more stable Euro and less chaos in trading Euro Zone stocks.

In the short term the budget cuts necessary to conform to any new European Central Bank requirements for bailout money may be bitter medicine. However, European leaders believe that the long term result will be a cure of recurring issues of national debt. In countries such as Italy and Spain the issue is not necessarily an immediate risk of debt default but high interest rates on debt payments. Such high rates will suck money out of necessary programs and inhibit economic growth. The increased European Central Bank power that will accompany treaty changes will likely result in bailout funds in return for fiscal responsibility, reducing the effects of local politics on budgets. It could also serve to remove continental politics from the equation when deciding to dispense loans to member nations. The wild card to investing in Europe in the new Central Bank era may be the Chinese. Rich with cash, Chinese companies have been looking for deals in the troubled European economy. Chinese investment in Europe could a welcome economic stimulus during these troubled times. It could also become a threat the European economic sovereignty if Europe does not look to protect its companies, especially the high tech sector. Unlike China, Europe does not put curbs on currency flow out of the EU. The long term net result of Chinese investment could be a drain on capital just as the EU starts to recover.

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