Lucky Obama, but Europe remains in the balance

I told you Obama is lucky didn’t I? Everything fell his way one more time. The EU moved a half step toward eventual euro bonds and of all people, it was arch conservative U.S. Supreme Court Chief Justice John Roberts who saved Obama Care by making the tax argument that Obama’s own lawyers had downplayed. I mean, you have to admit it. Luck is better than skill any day.

So, with the Supremes backing him up and the Europeans taking decisions that have the markets soaring today, it looks like the skids are being greased for an Obama return to the White House in November.

But while the news from Europe was positive, it was far from signaling the end of the game. To be sure, establishing the European Stability Mechanism (ESM) as the single body in charge of recapitalizing Europe’s ailing banks is a big step in the right direction, it still leaves much unclear and undecided. For starters, the bailout fund still doesn’t technically exist. It must be formally approved by each of the 17 countries that use the Euro by July 9. That’s coming up fast. So there is not much time for further conferencing if there are any unseen bumps in the road. Then there is the small question of where the money is coming from. The main focus of the ESM at this moment is to assist Spain and Italy by recapitalizing the Spanish banks and be reducing the cost of public debt issues for both countries. But 30 percent of the ESM’s capital is supposed to come from Spain and Italy. Does this mean they’re partially going to bail themselves out?

Even assuming this all gets sorted out quickly and smoothly and that the ESM gets enough money to achieve its objectives, the fact remains that they are still short term objectives. Italian Prime Minister Mario Monti has succeeded in persuading and scaring the Germans into recognition of the need for unified banking and for measures to reduce the cost of Spanish and Italian public debt service. That is a signal accomplishment. But by itself it won’t stop the repetition of market ups and downs and crises over the euro. There will have to be further follow on measures to establish credibility and confidence.

These will have to include some kind of centralized control over European national budgets along with pan European taxation and the issuance of Eurobonds guaranteed by all the member states or at least by those that share the Euro. At the same time, the problem countries and even countries like France that aren’t yet identified as problem countries but that are suffering from declining competitiveness must demonstrate their long term commitment to fiscal responsibility, labor market flexibility, and the achievement of lasting competitiveness. Finally, the European Central Bank must act more like the U.S. Federal Reserve in acting to do whatever it takes to stimulate growth.