Blogs & Comment

What's happening in the European Union

As both politicians and the central bank dither, the only certainty is that the EU is headed for recession.

Protesters demonstrate at Catalunya square in Barcelona on May 20, 2011 during a protest against Spain’s economic crisis and its sky-high jobless rate (Photo: Lluis Gene/AFP/Getty)

Optimism over last week’s summit to shore up the European Union (EU) is fading, as evidenced by the December 12 retreat both in stocks and the euro. Market strategists see the weakness continuing throughout this week.

The EU crisis could be ended by one announcement from the European Central Bank (ECB). All it has to say is that its printing press will be used to unreservedly buy up sufficient quantities of the bonds of peripheral EU members to keep their borrowing costs down. But, as Jacob Kierkegaard of the Peterson Institute writes in “The ECB: Using a Crisis to Maximize Leverage,” the ECB wants peripheral members of the EU to first convincingly demonstrate they are undertaking the austerity measures needed to put their fiscal houses in order.

Until the wayward states knuckle under, the ECB will hide behind EU rules against monetizing sovereign debt and let rising bond yields keep the pressure on politicians. But the required cutbacks in government programs will not be popular and the politicians can be expected to continue fudging and temporizing. So the EU crisis could become extended, swinging back and forth between pessimism and optimism, concludes Kierkegaard.

Meanwhile, the EU is slipping into recession and the austerity measures will only inflict more pain. The ECB must be aware of this and accepting of the risk that the stand-off could lead to the publics in the peripheral nations rebelling against the notion of a European union. One wonders if the eventual solution will then be a slimmed down EU with fewer members—or none at all.