Last week, news from Europe dominated the markets, as Thursday and Friday's summit was hailed as the "make or break" moment that would finally save the euro and European economies from impending collapse.
After rallying sharply on Friday, European markets are selling off sharply this morning, as investors are having second thoughts. And crucially, no other meetings among the European Union's high and mighty are scheduled between now and Christmas. Meanwhile, Standard & Poor's threat of a ratings downgrade of eurozone countries still hangs in the air. That's why I'm recommending you short European markets through Ultrashort MSCI Europe ETF (EPV) this week.
So here's a quick summary of what did -- and didn't -- happen at last week's summit.
The 17 eurozone governments and potentially nine others in the 27-nation European Union agreed in principle to a greater centralization of their budgets. This includes automatic punishment as soon as a euro country exceeds the deficit limit, which is 3% of gross domestic product. A second measure requires passage of a constitutional amendment, or a similar law, that pledges balanced budgets and includes automatic corrections -- what the Germans call "schuldenbremse" -- or "brakes on debt" -- if the so-called structural deficit (the deficit adjusted for the boom and bust of economic cycles) breaches 0.5% of GDP. The leaders also agreed to bring the 500 billion euro ($669 million) European Stability Mechanism bailout fund into action in 2012, a year ahead of schedule.
But the summit didn't substantially bolster the resources for the eurozone's bailout funds -- though it promised an extra 200 billion euro for the International Monetary Fund. It didn't approve the issuance of eurozone bonds linking the euro bailout funds to the European Central Bank (ECB). And it didn't pass on any bond losses ("haircuts") to private investors in future eurozone bailouts, confirming that Greece was unique case in that regard.
The summit also laid bare in stark relief the deep divisions in Europe- particularly, the gap between the views of U.K. Prime Minister David Cameron and Europe's first couple, Germany's Angela Merkel and Nicolas France's Sarkozy. Cameron outright rejected Friday's agreement outright as he failed to secure an exemption for the U.K.'s financial industry.
The press's reaction was extreme if predictable. The French harrumphed that they never really wanted the U.K. in the EU in the first place. The German press declared Cameron's exit a victory for Merkel's vision over the reviled Anglo-Saxon financial model. The irony, of course, is that Cameron's independent stance may actually enhance the U.K's status as financial center of Europe. If the German and French governments ever impose "Tobin taxes" on financial transactions on continental European banks, London would become the obvious place for European financial institutions to escape to.
Aside from nationalistic prancing, the elephant in the room is the practical issue of implementing and enforcing any agreement made in Brussels. As it stands today, 26 out of 27 prime ministers will have to do domestic political battles to get Friday's agreements confirmed. Good luck with that.
Then there is the pesky aspect of actual enforcement. Even the proposals don't include a common enforcement mechanism for the "schuldenbremse" or "debt brakes." That's a real problem. The 3% limit on fiscal deficits has been long a part of the E.U. system. It's just that there has been never a way to ever enforce it. And it is precisely that lack of enforcement that led to the current crises in Greece and elsewhere in Europe's periphery.
The bottom line? The closer the market looks at what happened in Europe last week, the less it will like it.
Short Europe now.