Analysis: After a summer lull, EU finds its plate piled high

By Luke Baker

BRUSSELS (BestGrowthStock) – By some accounts it hasn’t been a bad summer for the European Union.

The clouds that loomed ominously six or so weeks ago — the imminent threat of Greece defaulting on its debt, the fear that one or more European bank could fail stress tests, the sliding euro — largely dissipated during late July and August.

Once frazzled financial markets drifted into a summer lull and EU policymakers took a few weeks respite from the strain of coming up with creative ways to hold the euro zone and its currency together.

At the same time measures of the real EU economy began to perk up. Economic surveys reported growing confidence among businesses and consumers, inflation remained in check and growth in the currency zone was a surprisingly buoyant 1.0 percent in the second quarter — exceeding that of the United States.

But those few bright spots should be no cause for complacency and the uncertain skies, which never totally cleared, could rapidly turn dark once again.

When the European Union resumes business in September — and from a U.S. or Chinese perspective it must look odd that a bloc of 27 countries and 500 million people can, politically speaking, all but shut down for a month — it will have a wealth of macroeconomic and regulatory issues to tackle, any of which could tip the region back toward the turmoil it weathered so heavily in the first half of the year.

In diary terms alone, the agenda is hectic. There are so many summits, ministerial gatherings and policy pow-wows to cram into the remaining four months of the year that the EU will have to hold an average of one top-level meeting every four days until Christmas to get through it all.

But the substance is challenging too.

As well maintaining the insulation around Greece and other euro zone countries threatened by debt — and by extension the financial markets — pressure has to be kept on member states to cut spending and get their budget deficits back in check.

That austerity has to be balanced against concerns that growth, so encouraging in the second three months of the year, is likely to taper off in the second half as the U.S. and Chinese economies slow and export markets cool.

What’s more, the bullish second-quarter GDP figures were not the result of some broad-based euro zone rebound, but almost entirely down to Germany and its mammoth exports. So there is no time for coasting. All member states, with the possible exception of Germany, will have to tread a narrow tightrope that will involve trying to cut deficits aggressively while simultaneously containing unemployment and stimulating growth.

The good news is that all that juggling doesn’t have to be done in the context of an imminent sovereign debt default, even if the threat of one remains.

One marked success for the euro zone in the first half of the year was the agreement to establish the European Financial Stability Fund (EFSF), a 440 billion euro pot underwritten by member states that can be tapped by any who find themselves unable to refinance their debts in the financial markets.

It hasn’t been used so far and it will have been a success as a deterrent to debt market wolves if it is never dipped into.

As Nicolas Veron, a capital markets specialist at Brussels think-tank Bruegel, points out: “There will be no sovereign debt default in the next 6-12 months — what the euro zone has managed to do with the liquidity fund is transform crisis management from a short-term into a longer-term problem. It has bought itself time.”

Time is a good thing, but the EU also has deadlines. The other major issue it has to get to grips with in September and look to resolve by the end of the year is financial regulation.

While the challenges that throws up are distinct from the macroeconomic ones, failure to secure an agreement among member states and the European Parliament on a new regulatory framework and bring it into law early next year risks making the EU look divided and indecisive — characteristics readily exploited by financial markets and which turn investors off. In that respect, regulation and the broader economy are linked.

The EU’s financial regulation agenda is almost as frenetic as the economic one, but the chief goal is to secure agreement on the formation of three over-arching authorities to regulate banks, insurance companies and financial markets.

With the United States already several steps ahead of the EU in implementing changes to its regulatory framework — with a lighter touch than some EU states would like — Brussels finds itself under pressure to ensure its measures are aligned with Washington and avoid the possibility of two very different regulatory environments being created.

Getting 27 countries and the European Parliament — which is enjoying exercising its newly acquired powers — to agree is going to take a huge effort and a singleness of purpose that has not been the hallmark of EU decision-making in the past.

“If the EU fails to deliver on this, then it’s credibility on all other regulatory issues will be very low,” says Veron.

In other words, the dark clouds remain heavy overhead and the EU’s summer lull is very nearly over.

(Editing by Toby Chopra)

Analysis: After a summer lull, EU finds its plate piled high