The climax of Euro-zone debt crisis is behind us with the implementation of the ECB’s Long-Term Refinancing Operation – a three year cheap loan to hundreds of banks in the Euro-zone with no string attached. The loan facility has lent out over one trillium Euros, enough to cover the Italy debt renew in the coming months. The ECB has thus assumed de fact the lender of last resort for Euro nations. As I point out in my Notes on Feb. 11, 2012, the ECB’s actions are within the boundary of the ECB laws as the ultimate lender on “limited amount” and “temporary” basis.
So what’s the next step for Euro nations?
First, I think the fiscal integration will be completed in the next three years also. This step has already started and is led by Germany and France. Monetary integration must be accompanied with fiscal integration. With single interest rate and one cash printer for the monetary union, economic imbalance across the zone nations cannot be balanced, otherwise would be possible with their own interest rates and monetary supply mechanisms. For example, Greece could have printed its own money to alleviate the pain of mountain debt had its own money printer.
Second, a structure change has to take place to spur economic growth. The European economy growth has been slow and it met difficulty to adapt itself in the face of globalization. With competition from Emerging Markets and other developed countries, European, due to its traditions and cultures, has been very slow to adapt itself to the new environment. Structure changes have to take place, such as reducing social benefits, unemployment benefits and pension benefits. Policies should be developed to encourage employment and hard-working. The government debt is resulted from slow growth and excessive social benefits. With government austerity program in effect, economic growth is a challenge but not undoable. I hope the Euro-zone governments can be more open in their market and encourage investors from other countries such as German, U.S. and even emerging markets like China. The foreign investment will bring new ideas and competitions and therefore speed up structure changes in some of the Euro nations.
In summary, I think the second part will take much longer than three years. But if someone believes it will happen, then Euro nations will not be a bad investment zone in the years to come. An old Chinese proverb will be confirmed: “crisis creates opportunities”.