Borrowed Time

It's better than bad that the EU has finally agreed to proposals to save the Euro. At least they came up with guidelines that, if realized, will provide their economies with a window of opportunity for restoring growth.

But proposals being only proposals, the ultimate question is one of implementation. Eg., so banks write off 50% of their Greek debt while recapitalising to 9% of their assets. Suppose you're a bank with both problems on you hands. Where are you going to find the money to solve them?

And the EFSF bail-out fund is now authorised to increase to  €1 Tril?

Pathetic. French President Sarkozy needs to go begging to the Chinese to fund the EFSF. With their economy facing a slowdown, the Chinese will soon have plenty of internal needs for capital. And if they agree to contribute, what do you suppose the Chinese terms will be? Free from military and strategic conditions?

Let's put it another way: Would you loan the EU your money?

Still, the conference's proposals, if enacted, will provide a temporary solution in order to give the European economies time to return to growth. The big question is, how are they going to do it?

Take Greece, for example. The country is now condemned to extreme austerity measures and an unfavorable foreign exchange rate. Not components for economic revival.

Italy's proposals were only paper commitments by Berlusconi, which included raising the retirement age to 67. But can he get his proposals through the legislature and the courts? Right.

The German taxpayer is tapped out. France's AAA credit rating is under threat of being downgraded. And what of the EFSF itself? Since this past summer, it's borrowing costs have risen sharply. Have a look at the chart below, whch shows the EFSF (and France's) 10-yr rate over the Bund:

One way or another, Europe's borrowing costs are headed up, making it more difficult for these economies to grow.

So what's the solution? Fiscal union, of course. The long-standing criticism of the Euro has been that monetary union without fiscal union is unworkable. The one glimmer of  hope that came out of this conference was that the eurozone countries are planning to form an inner core that will work towards greater economic coordination.

In sum, the Euro basically dislodged two pillars of a nation's economic management: 1) the need to control supply and demand through setting of interest rates, and 2) the need to balance imports vs exports by setting its foreign exchange rate. Greece is the perfect example of how unrealistic the Euro experiment has been. This experiment was driven by politicians who ignored economic common sense.

Next week I'll be in Paris, and I'll try to get the opinion of those at the center of this crisis.

And by the way, yesterday's stock market rally was probably due to pent-up demand - based on generally good earnings - being unleashed by the proposed solutions to the EU crisis.  I'm sceptical.