Tyndall Monthly Commentary

Markets, perhaps in a triumph of hope over experience, somehow appeared to believe that the latest EU emergency summit would somehow deliver some form of shock and awe response that would solve the single currency's obvious problems and the associated financial crises that these problems had created.  

Admittedly, we had rather more modest expectations, believing instead that the European leaders would simply try to produce a statement that, while it might placate financial markets in the near term through talk of managed write-off processes and insurance schemes, would offer relatively little that might have solved the underlying problems within the system, namely the South's lack of competitiveness, the lack of growth in major countries such as Italy and the Euro's lack of credibility with the general public.  This was indeed the outcome of this latest in a long line of much-hyped but ultimately disappointing summits.

In the prepared statement offered by the leaders following their deliberations late into the night, point two in the document stresses at the outset their continued commitment to price stability in the region.  Since Germany accounts for 29% of Eurozone GDP, this is tantamount to saying that German inflation must remain under 3% for the foreseeable future in order for the ECB to hit its price stability target, a commitment that implicitly reaffirms the Union's belief that the periphery must suffer unit labour cost deflation in order to regain its competitiveness.  

In theory, this labour unit cost deflation could occur via productivity growth (something that the document blithely suggests without giving any details just how it should be achieved) but for an economy such as Italy, in which 67% of the population work in the service sector and 11% are employed in either the construction or agriculture sectors (in which it is notoriously difficult to raise productivity growth), we are somewhat skeptical that productivity growth can be achieved in the medium term, let alone virtually overnight.