Did the EU Summit represent genuine progress?

2nd July 2012

In a nutshell, there were two main tenets to the agreement forged at the summit. The bailout of the Spanish banks: "The agreement will result in EU bailout funds eventually being injected directly into teetering Spanish financial institutions, meaning Madrid can sweep the burden of the bailouts off its sovereign books."…and the new regulator: "The rescue for Spain's banks will only come after the creation of a single banking supervisor to be run by the European Central Bank."

The Eurozone members issued the usual PR statements about the agreement being a triumph, but perhaps the most unequivocal response came from Ireland. The Irish government declared the agreement to be a ‘game-changer'. It said it would help it return to international bond markets and meant it should escape the need for a second bailout.

With a more objective eye, Keith Wade, chief economist at Schroders believes progress was made: "The summit addressed one of the key issues – sovereignty. Previously, when intervention took place, it was clear that existing investors would be subordinated. They would be the last in the queue to get their money back. This was one of the things that they addressed at the conference…and was the main reason there was a rally in yields."

He says that there still has to be conditionality to any intervention and the fiscal compact is essential, particularly for Germany to protect its interests. He believes Angela Merkel will succeed in getting the new agreement through the Germany parliament.

Wade also suggests that the agreement showed a more assertive Italy and Spain. With the election of President Hollande in France, the outlook has changed to more resolutely pro-growth.

But there are those who suggest the optimism may be overdone. Shaun Richards, for example, is sceptical about the euphoria surrounding the deal. He agrees that resolving the issue of seniority was important: "This may seem technical but if you are buying a Spanish government bond you will not like a situation where, with apologies to George Orwell, some bonds are more equal than others. Because should matters deteriorate further you would have to shoulder more of any default or debt haircut burden if official holders of bonds can step aside."

His argument is that much of the agreement was nothing new. A few weeks ago everyone thought a bank bailout was being arranged for Spain anyway. He also believes that markets will not separate bank debt from sovereign debt in the way hoped by policymakers.

The Wall Street Journal suggests a more gloomy interpretation: "Another way is that the deal puts Europe's remaining solvent states on the hook for more of the debts of the southern periphery. That may soon include France and its 90%-of-GDP sovereign debt."

The piece also points out the limitations of a banking union: "The banking union piece of the agreement…should be met with some skepticism. Spain will get relief from bailing out its banks, which will instead be able to borrow directly from the European Stability Mechanism.

"That might not be the worst idea in the world-if the planned new regulator is able to impose real discipline on the banks in return for this backstop. But will the ECB really be willing to shut down the losers, fire the management and so on from Frankfurt, if Madrid won't do it now?"

The comment boards were also quick to reflect on the problems such a union might encounter. For example, Paul Shang wrote: "ECB can shut down a bank but who is going to pay depositors? How will the depositors live and pay their bills without their bank accounts? If Europe is trying to establish supervisory systems like FED and FDIC, it will take them 100 years to get it right. By that time, Europe won't be around. Barbarian will rule!" Another asked, not unreasonably, who would bailout Europe when Germany's coffers had run dry.

There were undoubtedly good decisions that came out of the summit. However, a long-term solution still seems some way away. This may have been progress, but there is still a hill to climb.


More on Mindful Money

The real Euro 2012: the economic championship of Europe

Germany: The eurozone winners

Towards a Brixit

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The Financialist

21 thoughts on “Did the EU Summit represent genuine progress?”

  1. Patrick says:

    For crying out loud, is there no way to put a limit on BTL ownership!

    It quickly becomes an entirely selfish investment that does next to nothing to benefit the wider economy, and has clearly been a nothing short of a plague for the past 10 to 15 years.

    Can the government not do something to make investment in genuine business enterprises and technical innovation much more attractive? Can we not force multiple BTL owners to fork out money that is invested into the wider community in which their properties reside to rebalance the social cost? Is there no way to prevent foreign entities from buying UK property and land?

    What on earth have they/we let happen to this country, and why are we/they just letting it get worse every day?

    (Apologies for rant, but there’s so many news stories today about how the low income are being hit hardest, at the same time as the asset rich are actually thriving – and I can’t get my head around why there’s aren’t politicos jumping all over this to get some attention, as opposed to just highlighint mostly jingoistic hyperbole about immigration from Bulgaria and Romania, or money going out to Poland etc).

    1. forbin says:

      oh come come , many plebs have bought into BTL to provide their pensions – I mean have you seen the effect of QE on annuities ?

      Dont blame them !

      Also who bennifits from these house prices ? well the if we had a proper house market correction then the Banks would need bailing out. Its another stealth bailout ! just like FLS.

      In the meantime we have a nice gentle unwinding of the housing debt – if only they could engineer some wager inflation ….. stupid fools , they tied us to competition with china over wages – ho ho ho clear looser there then.

      so keep them happy , well fed ( even if its Dobbin !! ) and entertained ( East corri dale ) and keep yer hands of their stash !! ( banks that is ).

      If you’re to top 1 % , Whats not to like?

      Cheaper prices in London ? hah! let the plebs in! cant have their sort lowering the tone of the place !

      Sit back Patrick , take a seat, here have some popcorn , the show must go on…..


      1. Patrick says:

        I can’t have popcorn without it being drenched in high fat, non-dairy, butter-esque oil based lubricant on it, and my blood pressure doesn’t need the help. Maybe I will go the Nachos with ‘cheese’ sauce route instead.

        Slow unwinding? Inflated prices plus lower than average interest rates means over-leveraged FTB and property ladder climbers. Wage inflation would still be below real inflation, so would there be any extra income to overpay on those mortgages? FTB battling it out with BTL landlords, with only the moderate relative expense of FTB vs BTL mortgages to act as a disincentive.

        I didn’t think it was possible, but I’m expecting house prices in all but the most deprived areas to begin rising again soon, due to BTL, both domestic and foreign, and expectation of an increase in immigration looking to let, and potentially being subsidised to do so.

        Interesting that the articles referred to in Shaun’s post, reference people down-sizing… I’d be interested to see whether this is to smaller square footage, as opposed to down-sizing in terms of financial liability via re-location to a cheaper area… or are people looking to nab the equity/bubble profit and get the f**k out of Dodge…

        1. Anonymous says:

          Hi Patrick

          Here is the section which refers to this from Rightmove’s report today.

          ““Those who bought thirty to forty years ago reaped the rewards of several price booms and many are now of an age where they wish to downsize, release equity and reduce their outgoings. These make up the largest group of intending sellers and, in many instances, they have
          the advantage of being cash buyers. With increased life expectancy they face the challenge of supporting themselves financially for longer than previous generations, but have the head start of multiple-level return on their original investment in property.”

          So whilst there is probably some actual downsizing in terms of space it looks as though the main driver is a type of deleveraging and taking profits.

          1. Patrick says:

            Thanks for the detail Shaun.

    2. JW says:

      Hi Patrick

      I think this is what the ‘mansion tax’ proposals of both Labour and Libdems is supposed to address. What can be wrong with redistributing wealth from the rich? Housing over £2m and if I read correctly , aggregate land/housing ( if mutiple ownership) over £2m. Whats not to like in our desperate times?

      Well , as someone living in France and seeing how ‘wealth tax’ limits are changed with increasing regularity, quite a lot actually. Of course if you look closely at the various moves of HRMC and Impots de France over the last few years its no coincidence that they look like a coordinated dance. Half the population of Greater London would be clobbered for French Wealth tax this year, for instance.

      Big dangers in getting what you wish for…..

      1. Patrick says:

        I feel there’s a distinction (for me) between redistributing the current wealth of the rich, with actively facilitating the increased enrichment of the rich during a time when the majority are suffering. It’s profiteering by any other name. There is no longer any kind of equality of opportunity, and only a widening of the gap between the rich and the rest of us.

        I probably don’t agree with the idea of a mansion tax on a home – I think the very name is offensive (and deliberately divisive), as a £2,000,000 homes in London are certainly not approaching mansion status in any literal dictionary sense. (All relative I suppose). However, I do feel that something similar, applied to multiple property ownership on an increasing scale is entirely justifiable and desirable due to the negative contribution that BTL speculation has had, and will continue to have.

        In addition, as I’ve ranted on about before (I do acknowledge this being a rant :) I believe we should be looking at a way to tax profits on the value of assets that have appreciated as part of a bubble as opposed to improvement or investment.

        We have to move our society away from the idea of money for/from nothing, but perhaps this is impossible when benefits are imbalanced compared to work, (Tax thresholds) and banks are the biggest alchemists of all.

        1. Patrick says:

          Sorry, that first paragraph is a bit garbled – There’s a massive distinction between those two grammatically… I meant that we could take actions to limit the wealthy/asset rich from rapidly increasing their wealth/asset count during a time of national hardship, without having to resort to more basic wealth distribution such as a tax on the wealth tied up in their homes.

    3. Anonymous says:

      Germany has laws that really favour tenants and keep rents moderate. Relax planning laws to encourage self build. (Will enhance supply and therefore reduce price pressures)

      Also you can modify the tax laws – why should BTL investors get tax breaks on interest, costs etc when home owners do not ? (Quoted from NZHerald)

      And you could cap council tax benefits so that mansion owners (especially elderly with low occupancy) cannot avoid council tax. If your earnings are so low, and you have a big empty place – the taxpayers should not be subsidising you. Pay full council tax or downsize.

      And on the Bulgarian topic – unemployment benefit here is only paid to workers who have paid employment taxes, bad luck for those in the black economy or Brits arriving here. The is pukka under EU law as they treat locals the same.

      Sadly Britain is likely to gain a lot of Bulgarian freeloaders, but we have plenty in Britain that have never paid in gaining council houses and benefits. This looks like it cannot be sustained for ever, and the longer they borrow from the future and print funny money -> the worse the eventual bust.

      1. Anonymous says:

        Hi ExpatInBG

        This section ” investors get tax breaks on interest, costs etc ” is proving to be a problem much wider than in the housing market as we see private equity firms (a misnomer in many cases) loading up on debt. Many products now have to carry a deadweight of debt leading to cost cutting pressure which affects quality and in its own way contributed to the horsemeat saga.

        I was reading about the owner of various brands including for example Mr.Kiplings cakes and Hovis bread yesterday where the debt is rising but as products get sold off to pay it they ability to pay shrinks..

        So I think we will have to modify the way that interest can be charged and in some instances stop it, but it wont be easy…

        1. Anonymous says:

          Yes Shaun, the debt/speculation reward should be trimmed. Acquisition does not add to productivity, it does not increase real wealth. Investment to improve productivity/output should increase real wealth. The 2 cases could have different tax treatment ….

          I also think that the BTL brigade is a response to failings in the share market. Small investors have not received good returns and often lost money, where investment and pension funds seem to charge excessive fees regardless of results.

          Sharebrokers reap rich margins. Company directors reap rich rewards, far too often they get rewarded for failure. Small wonder that small investors feel they are getting cheated and cannot win. BTL is a safer bet. To correct this we’d need to improve corporate governance and improve the economic incentives on shares for small investors.

  2. forbin says:

    Hello Shaun

    Did you change the title ? I’m sure I read

    Is the Bank of England’s support for the housing market firing banks?

    instead of

    Is the Bank of England’s support for the housing market firing blanks?

    earlier today …….

    the first would have been more interesting “..firing Banks ” oh if only we were so lucky !


    1. Anonymous says:

      No it was all in your imagination Forbin! :)

  3. WilliamOne says:

    The recent falls in the pound won’t make things any easier for those trying to live in London, expect more overseas buyers tempted into the London bubble.

    1. JW says:

      Hi WilliamOne

      Indeed as Londonprime is all about a hedge against inflation and currency fluctuations. 15% K&C increase 2012 is all about fears of inflation ( worldwide) and sterling depreciation. The option price for the hedge ( ie the ‘house price’) has increased three fold in the last 12 years. Euro fears and lack of alternative ‘investment vehicles’ means this is not running out of steam. Of course buyers of the ‘option’ may diversify into other areas of ‘Richistan’ ( Manhattan, Monte Carlo, Moscow, HK, Singapore, Geneva) if the locals impose too high annual ‘management fees’ ( Council taxes, mansion taxes etc).

      1. Anonymous says:

        Hi JW,

        Most of the Russians I speak to want to get their money out of Moscow for safety and London has legal stability. Given a pessimistic longer term outlook for sterling, I am bearish on UK property and think it’s more likely to reduce in real values.

    2. Anonymous says:

      Hi William

      I was thinking that myself and the infrastructure is building to as for example there is now a L’Ecole de Battersea (someone was ahead of the gsme in 2005….).

  4. forbin says:

    Hello Shaun

    on a side subject I noticed the standard of journalism has improved on MiniTru ( BBC) today ……



  5. ernie says:

    Whatever we think of the merits or demerits of BTL etc, one thing is always missing from these sort of discussions, especially with the policy makers in govt/BofE it seems. That is – how are higher and rising house prices beneficial to the economy? Although there is some extra consumption “advantage” to GDP this is always at the expense of more borrowing. The only real beneficiaries are the financial institutions who lend the money. The wider economy is seriously hampered by over-priced cost of shelter and its cousin over-priced cost of commercial rentals. These have, over time, a significant negative impact on the UK economy which easily outweighs the minor benefits to limited sections of the economy. The idea of people rejoicing in the increasing cost of a good is bizarre. I can’t think of any other facet of life where we jump for joy when things go up!

  6. David Lilley says:


    You keep returning to house prices with previous blogs on a lost decade and increasing mortgage rates. What you find bad about the housing market I find good.

    Let me explain in bullet points:

    -A house keeps the weather out but a business premises does much more. It is one of the four essential ingredients in wealth creation; land, labour, capital and enterprise. It is therefore bad news when much of our nations capital is sucked into unproductive tent substitutes.

    -Buy-to-let sucked in 1m suckers. Suckers because they thought rocketing house prices could continue to rocket forever, suckers because they thought low interest rates would be permanent and suckers because most would be unaware that they would have to pay CGT on exit.

    -It is largely due to the BTL brigade that house prices rose so much as they put irrational demand into the market.

    -House price rises in the past ran out of steam when the building societies ran out of savers funds to cover mortgages and the BSs would have to decline further mortgage lending. House prices never grew faster than the inflation in the price of a Mars bar and always maintained their value of three times the average salary despite the home improvement money spent on them.

    -House prices are over-valued by the historic three times salary measure by as much as 200% and we should all tell our children to beware and to choose a SIPPS to build collteral that can be used as a default deposit and minimiser of mortgage payments.

    -Two myths are building at the moment That the baby boomers have never had it so good and that house prices have been remarkably resilient and only fallen a couple of percent compared to 60% falls in Eire for example. Baby boomers have had it hard all their lives due to more competition for eduction, jobs, buying a home and retirement income. And house prices have fallen a couple of percent plus a 20% inflation adjustment, and that is just the average price that is heavily London weighted. Some have fallen 50% in real terms.

    -As I have mentioned before. It is no longer the case that the BoE changes its base rate and the lenders change their rates the following day to loans at base rate plus one percent and savings rates at base less one percent. The banks have such a hole in their balance sheets thanks to Joe Public defaulting that they have increased their spread four-fold.

    Surely we must all hope, as good citizens, that the surprise uplift in the fortunes of the baby boomers who saw a surprise threefold real-terms uplift in their property value will evapourate. And young people, who have never had it so bad, will no longer be fodder for the BTL brigade and can start having children before they are forty.

    1. JW says:

      Di you think its not possible that many of those young people who have it so bad would be left the majority of that surprise uplift in fortunes by their baby boomer parents unless of course the rapacious state took it all in taxes? Of course nanny state knows best , doesn’t it? Or could it be that some of those selfish parents actually give some of their ill-begotten wealth to their offspring before their seeds dry up from old age?

      And the hole in the bank’s balance sheets has very little to do with joe public.

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