The euro area crisis summit of Wednesday is likely to disappoint

The work before the European authorities appears too huge to be solved in just a few days. The European crisis was not solved on Sunday and probably won’t be solved on Wednesday, when European heads of state are meeting once more.

Five areas are currently in the focus of policymakers: sustainability of public finances, Greece, leverage of the European Financial Stability Facility (EFSF), European banking recapitalisation and fiscal integration. In these respects, authorities are likely to take decisions that will certainly help moving in the right direction. But the amounts involved are likely to fall short of what is needed for a definitive resolution.

The resistance to involve the European Central Bank (ECB) in the solution means that the decisions will suffer from their lack of means. The announcement is unlikely to dismiss risks of contagion for Italy and Spain. Without a floor for these countries’ sovereign debt prices, the debt servicing burden risks increasing further, and banks continue to need to deleverage their balance sheets.

This could end in a severe credit crunch while the euro area economy is already headed for a possible recession (see chart below) and could trigger a new round of panic regarding the future of the monetary union, which could call again for new summits and official measures.

These cycles could last for a while until the European authorities decide to step in with decisive solutions involving the ECB and a move towards a form of fiscal union. While financial markets may temporarily welcome Wednesday’s decisions, they will certainly not mark the end of the Euro area debt crisis.

GDP growth and PMI survey in the euro area:

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