The ECB hasn't saved the Euro
There was widespread relief last week and a rally in the Euro as European Central Bank President Mario Draghi started to make good on his promise to do what ever it takes to save the single currency by mapping out a plan to stabilise peripheral Eurozone bond markets.
So the Eurozone crisis is over and they'll one day be putting up statues of super Mario across Europe's capitals in celebration? Don't count on it. The Long Term Refinancing Operation announced in December 2011 to beef up Eurozone banks involving over half trillion euros was supposed to do the business – it didn't.
Assuming all the various political hurdles are surmounted and Spain asks for bailout help, a condition for ECB support, there is still one crucial missing component and that is economic growth. Investors know that this is required for there to be any hope of paying down national debts and there's precious little sign of that happening now or in the future. Forced austerity is making the situation worse.
Many peripheral countries are deeply uncompetitive, so Spain requiring nearly 25% unemployment to repair its current account deficit is, socially speaking, unsustainable. Another huge problem is that southern European countries have rapidly ageing populations meaning there are more pensioners relying on a shrinking pool of workers. That means lower economic growth potential combined with rising demands on state coffers. There's the horrible prospect that Eurozone peripheral bond markets will become hopelessly addicted to ECB support, which will create huge political tensions.
But the ECB did what it had to do and now Eurozone leaders must deliver on a credible economic growth plan and at best that will be slow. It is therefore highly likely that within six months the Euro will once again be facing an existential crisis with calls for the ECB to pull out the big bazooka or possibly for the Eurozone to launch Eurobonds to replace national bonds. The markets are driving Eurozone integration at a breakneck pace, but social and political factors could still put a spanner in the works. For traders this means plenty of volatility ahead.