Market Brief: Integration

“No liability without controls.” Those were the words of German Chancellor Angela Merkel in mid-June. Four simple but meaningful words. What did she mean by it? Simply, she was telling Europe that Germany is unwilling to accept the liabilities of other countries unless Germany has some level of control over the policies and activities of those governments. That was then, this is now. Late last week, those words were put to the test when European leaders met (again) to attempt to forge a solution to the European debt crisis. After a marathon 15 hour negotiating session in which leaders from Italy, Spain and France united to attempt to soften Mrs. Merkel’s stance, she caved and agreed to a deal-sort of.

What’s in the deal?

  • Italian and Spanish governments could qualify for bailout funds, if needed, from the European Stability Mechanism (ESM) if they follow the basic fiscal guidelines that are laid out in the Maastricht Treaty (they would not have to agree to further austerity measures like Greece, Ireland and Portugal).
  • The ESM could shore up Spanish banks directly rather than lending to the Spanish government and having the Spanish government shore up banks. This would, in theory, keep the Spanish governments debts from growing like Greece’s did when it took bailout funds. This would only be permitted, however, after a Europe-wide banking supervisor is established. This is slated for discussion near the end of the year.
  • Private bondholders of Spanish banks would no longer be subordinated to governments. This could, in theory, keep market rates of bank bonds from rising. After all, bonds that are subordinated to other bonds should be worth less, and therefore, yield more. Rising yields are part of the problem.


If that sounds like a lot of jargon, it is. In short, markets viewed it as a baby step toward a more integrated European political and financial system. It is only a baby step, but it is something. Global markets cheered, and most European stock markets, as well as our own, advanced.The crisis, however, is not solved. The ESM is still viewed by markets as insufficient in size and scale. It currently has about a half-a-trillion Euros of firepower. We’ve seen estimates suggesting that about €2 trillion is needed. There are issues with Euro-wide enforcement mechanisms. In the end, this deal looks like another band-aid. On the bright side, the initiatives are aimed (minimal as they are) at something that markets have demanded and prior agreements have mostly lacked-more fiscal and political integration.


Evan S. Russell, CFP®, Stacy L. Rerick, CFP®, Ronald E. Wilkinson, CFP®