How Monti works on a changed ECB-role

Yesterday's summit in Strasbourg has proved, that the future architecture of European leadership will be different from the German-French "Directorate", that was in place since the Greek crises has begun. Under the highly respected Mario Monti Italy is returning on the stage. Both, German Chancellor Merkel as well as the French President Sarkozy have made that clear yesterday, with words but also with gestures. The dark days of Italy's international isolation caused by Berlusconi are definitively over. But what will Monti do with the renewed influence?

Be sure, that he has apart from his domestic an articulated European agenda. The Professor spent during his two mandates as EU-Commissioner so much time on Brussels that he is a truly European and remains an indiscussed expert on all communitarian matters.
During the trilateral meeting yesterday the leaders have talked also about the two hottest topics at the moment: Eurobonds and a changed role of the ECB as lender of last resort. Listening to them afterwards it became clear that the first topic remains unpalatable to Germany. The fact, that Sarkozy as a strong advocate for Eurobonds showed a super-cautious attitude during the press conference is a signal, that not only Merkel but also Monti has influenced him, to be more realistic.

Even more interesting than that is, what the three said and what they didn't say about the ECB: they underscore the total independence of the Central Bank from politics. After the criticsm, that Merkel didn't even try to hide in the last months, this is a new tonality. Also here: hard to believe that Monti has been ininfluential to this. Nobody talked about about a possible new role of the ECB, which in combination with the highlightig of the independence makes a lot of sense. Why? Because it means that the institution led by Mario Draghi could have in the future more options to interpret it's role with more freedom and without the current risk, that the governments, overall the German,  interfere too heavily. I can imagine that Bundesbank Governor Jens Weidmann, a former Merkel advisor, who is categorically against any enlargement of the role of the ECB, was not amused yesterday. Without the political rear cover he will feel on the future more and more alone in his fight, because most members of the governing council, including President Draghi, are more open to discuss about a new interpretation of the role for the ECB. By the way: it would be strange if Monti and Draghi, who know each other very well, have not talked recently exactly about that.

So I proved right yesterday in saying that Italy under Monti will start to influence in a critical manner the current discussions, but I proved wrong in saying, that this would be bad news for Angela Merkel. On the contrary, my impression is now, that she will one day use the new set-up of the European leadership to explain at home, because Germany has to accept, that the ECB becomes more Fed-like as lender of last resort. She knows perfectly that it's always better to digest controversial decisons with a convincing narrative.

Will France and Italy build now an alliance against Germany?

When the German Chancellor Angela Merkel and the French President Nicolas Sarkozy meet today Mario Monti, the recently appointed Italian Prime Minister, the Frenchman will be more pleased than his German counterpart. The reason is obvious: the EU Co-founder Italy is returning after Berlusconi dynamically on the international stage and will under the former EU-competition Commissioner with his no-joke style play a much heavier role than it used to play under his completely discredited predeccesor.
While Sarkozy and Merkel formed a kind of European directorate since the Greek crises broke out, France could have in the future more options. With a more influential Italy, Sarkozy will have a potential ally that up to now was not at his disposal. Don't forget: France and Italy are after Germany  by far the biggest countries of the Eurozone. If they would pool their interestests, Germany would inevitabily drive in a weaker position than before.
Because one thing has to be clear: Germany with it's unreasonable only-austerity-ideology today  is isolated in Europe. Maybe the Finns have similar ideas, but not even the stability oriented Dutch agree on the orthodox attitude of the German government and - worse - the Bundesbank.
So new scenarios emerge if France opens up to Italy and stops treating exclusively with Germany about solutions for the crises and the future governance of the Eurozone. That could mean a new push for a changed role of the ECB as lender of last resort or in the mid term the creation of Eurobonds.

European deal risks on many unclear details

Whoever analyses the outcome the European summit, that terminated at 4:30 this night, struggles with a clear valuation.
Sure, all three chapters that had to be adressed, were adressed: orderly default of Greece, fresh capital for banks and the strengthening of the firepower of the EFRS. The problem is not even, that the expectations on the single dossiers were disappointed, no that's not the point, because a 50% headcut on Greece's debt, 108 Bill. of cap hike for the leading 70 European banks and the strengthening of the EFSF to 1 Trillion Euro are impressive figures. I hadn't anymore expected that, overall from the German side.
The issue is about lack of details and the unclear implementation. In management terms you call that execution risks.
While Greece is the most concrete dossier with remaining uncertainties about the concrete adherence of the bank, the capital strengthening plan seems more nebulous. While the target sum of 9% "highest quality capital" is clear, it remains open, which assets banks can count as capital in that definition. This question had to be answered upfront, in my view.
The most fuzzy thing is however the quadrupling of the EFSF. European leaders didn't even name the final sum because of the many uncertainties. Pundits calculate, that it should be roundabout 1 Trillion Euro, but nobody said that officially. And the mechanisms are vague (insurance solution with the participation of private investor, but how, who, what conditions?)
The impression remains, that the leaders had committed themselves in a political move to the bottomline. How this bottomline will work, has to defined later. This process is very top-down and it is well known, how many risks such a design runs.

Europe needs more courage

The European Union has two substantial problems, one is fragmentation, the other a lack of courage. Fragmentation makes the political process messy and complex. Different countries in different situations have different interests. It is hard to talk with one voice and to act with one hand in a Union of 27 and a single currency zone of 17 countries.  
A lack of courage makes it on the other hand impossible to address rapidly and effectively a crises. The Greek dossier is now on the table for two years without being resolved. Now the possible default risks to become a  major problem for the survival of the whole Euro zone. European leaders, overall the German chancellor and the French president, have failed to treat the problem properly. The handling was far too timid. Otherwise the crises could not spill over to some of the biggest core countries of the Euro zone, notably Spain and Italy. 
Greece has a public debt of not even 400 Bill. Euro, Spain roughly double and Italy more than four times that amount. Nice difference, isn't it? The figures show, how disastrous a full blown contagion would be. Europe would not be prepared for that.
Up to now the leaders agreed to set up a European financial stability facility of 440 Bill. Euro, that should step in to stabilize weak countries, if it occurs. For Greece the current dimension of this rescue fund seems to be sufficient. Not for Italy and Spain. Their debt piles are far too massive to be handled by the EFSF. So the first thing to do is therefore to beef up these funds by four to five times of todays dimension. It seems to be bold, but there is no choice. Furthermore the fund could be leveraged, if needed, which would prevent money-flows from the member countries. Market participants would soon recognize, that European leaders will not accept a failure of the Euro zone. This would lift most of the pressure and provide air to breath. In that scenario I'm quite sure that the fund would not even be used.  
As a second step European banks should be recapitalized in oder to end the speculations of bank defaults. The balance sheets of the banks are full of sovereign debt, Italian banks have mostly Italian bonds, Spanish banks spanish bonds and Greek banks greek bonds. As long as markets valued this sovereign debt as risk free it didn't represent a problem, now that the markets calculate with a probability of sovereign default it has become a major issue overall for the bank of the crises countries. There is no way out, the capital of these institutions have to be strengthened, if possible through the markets, if necessary with public money. A bank default would cost far more than the amount of money, that should be now injected into the system, overall because it is not thrown in a dust bin. The government would simply buy a stake of the system, that could be sold in the next couple of years, maybe even with profit. 
Beefing up the EFSF means to stop the market rout, strengthening the banks capital base means providing the financial system with stability and calm the nerves. The debt crises could be ended in that way. 
Europe needs to act quickly. The alternative is not acceptable. The Euro zone would be destroyed and a prolonged, severe economic crises would follow. In such a gloom-and-doom-scenario the social and political effects for the continent are totally unclear.  
Do the European leaders have enough courage to do the right thing?