MontiaEUR(TM)s Resignation Redraws Attention to Eurozone Crisis
December 10, 2012
Ever since ECB President Mario Draghi made his dramatic whatever it takes remarks in London in late July, the Eurozone crisis has largely receded from the front pages of the Financial Times and the concerns of investors. Indeed, European equity and bond markets have performed well, despite the fact that Spain has so far abstained from using the Outright Monetary Transactions (OMT) mechanism, while Greece has been forced to enter into a costly debt buyback in order to qualify for much needed assistance from the TroikaaEUR"IMF, EC and ECB. However, the impending resignation of Mario Monti, the current technocratic prime minister of Italy, forced by the withdrawal of support from former Prime Minister Silvio BerlusconiaEUR(TM)s party, has once again brought into focus continuing political and policy uncertainties./ Economic pressures continue to mount, particularly in the form of rising public debt.

The resignation of Prime Minister Monti in one sense is not a big deal as new elections were scheduled to be held by April 2013. Elections will now be required to take place within 70 days of MontiaEUR(TM)s official departure, which he says will take place as soon as the 2013 budget is voted on by parliament, before yearend. What the resignation highlights is the growing problem throughout Europe of reform and austerity fatigue. For a little more than a year Monti has been one of the chief architects of austerity and reform measures. To his credit, he has been successful in seeing the passage of a number of successful reforms, despite significant opposition from labor unions. This has taken place at the same time the Italian economy has declined for five consecutive quarters while the government debt to GDP ratio continued to climb to more than 125 percent. With no end in sight, the electorate in ItalyaEUR"like elsewhereaEUR"has become discouraged and restless. However, there is no clear front runner in place to become prime minister, and there is little indication what actual policies might be put in place by the next government.

The events in Italy could bring more attention to the EU heads of government meeting in Brussels on December 13-14. The general consensus has been that not much would be accomplished in defining in more detail the road map for further Eurozone integration. At the moment, progress on a banking union appears to be stalled over German resistance to include all of its banks under a Single Supervisory Mechanism (SSM). In addition, there also appears to be concern over how to construct an adequate wall between decisions of the monetary and banking supervisory authorities. Summit participants might now feel more pressure to at least give some indication in their communique that progress on these apparent stumbling blocks is being made.