Is the run of good news in Europe too much of a good thing?
Europe has enjoyed a rare string of market-lifting news. It started in late July, when European Central Bank boss Mario Draghi announced the ECB would "do whatever it takes" to spare the euro from oblivion. That triggered one of the strongest bank rallies since the 2008 credit crunch.
The good news continued last week, when Mr. Draghi – Super Mario – unveiled the ECB's plan to buy the sovereign debt of clapped-out countries in an effort to provide liquidity and bring down funding costs.
Two more sweeteners came on Wednesday, both biggies. Germany's constitutional court gave the effective go-ahead to €500-billion European Stability Mechanism, the new rescue fund that is to come into effect shortly. Hours later, Dutch voters rejected the Eurosceptic parties in the general election. The victor was Mark Rutte, the current prime minister, who leads the centre-right, and broadly pro-European, Liberals. Another pro-Europe party, the centre-left Liberals, came a close second. Geert Wilders's far-right Eurosceptic (and anti-Muslim) Party of Freedom saw its vote cut nearly in half.
There's more. While the 17-country euro zone as a whole has slipped back into recession, a few EU countries are pumping out encouraging data. One is Britain, where 236,000 jobs have been created in the last three months, according to the labour market survey released Wednesday. While some of the gains are no doubt due to the Olympics, many are probably not. Britain is officially back in recession, three successive quarters of negative growth. The jobs numbers suggest the growth figures are not as grim as they appear.
The upshot of all the gorgeous news is a sustained market rally, a euro trading at a four-month high of $1.29 (U.S.) and plummeting sovereign bond yields in Italy and Spain, the two countries at the centre of the crisis. While their yields are still uncomfortably high, they are nowhere near as ugly as they were early in the summer. Spain's 10-year yield is about 5.6 per cent, versus about 7.2 per cent a couple of months ago. Spanish prime minister Mariano Rajoy is now delivering the message that Spain no longer needs assistance from the ESM and the ECB.
We will see. The problem with all good-news run (other than that it is unlikely to last as they don't change the national debt loads one iota, and will not change the fact that the euro zone is in recession) is that they can lead to national complacency. As James Mackintosh of the Financial Times noted in his "Short View" column on Thursday, "Too much relief might be self-defeating."
Indeed, when relief rallies come, and sovereign yields fall, government leaders and finance ministers, aware that they want to get re-elected, tend to lobby for more lenient austerity measures or simply abandon some of the measures that they had promised in exchange for international assistance. With falling yields, politicians in Spain and Italy will be tempted to put off reforms, especially Italy, which faces an election in the spring.
If the economic reform programs fade away, Europe's long-delayed effort to make itself more competitive will fail, ensuring the crisis becomes permanent and ultimately fatal to the euro zone's integrity. The string of good news was welcomed by investors and politicians. If it leads to reform laziness, it will backfire.