- The June 28/29 European summit changed the political course of the European debt crisis, after the election of Francois Hollande in France. The July meeting of the Board of Governors of the ECB paved the way for a higher role of monetary policy in managing the crisis. But both fronts remain on hold.
- Wider differences within the euro area. The differences between the "peripheral" countries (with massive capital flight; high or unsustainable yields on sovereign debt; credit default swaps above 450 basis points) and the "core" countries such as Germany and France (attracting capital to it's debt even with negative yields) are now wider. The European debt crisis is now focused on two major European economies, Spain and Italy.
- Monetary policies not achieving pretended effects. U.S., U.K., Eurozone and China central banks' monetary policies are not generating the desired effects on the real economy. Growth forecasts for 2012 in these economies are alarming: the euro zone will fall into recession, (-0.3% of GDP) and the UK will have zero growth; China could only reach 7.5%; and the U.S. could review its target, now between 1.9% and 2.4%.
- The failure of the transmission mechanism of monetary policy. The 1 trillion euros three year LTRO, was not reflected in credit to the real economy, and strengthened the dangerous link between banks and sovereign debt. Furthermore, we are assisting to an increasingly flight to safe havens (even with negative yields) and to the use of the ECB deposit facility to park money.
- Higher commodity prices. The FAO index - which includes notably sugar, cereals, dairy products, and meat - rose 6% in July. On the energy side, Brent rose from 89 Usd on June 21, to 113 Usd on August 10, a 27% rise.
- The Fiscal Union Vs UK in the EU. Debate in the UK over its permanence in the European Union if the current "fiscal union" plan moves forward. Peter Mandelson, back in May, raised the possibility of a referendum on the issue and Tony Blair drew attention to this risk. The eventual exit of the UK from the EU would be a major geostrategic change for Europe.
- Referendum in Germany on EU options. Although Merkel, has resisted so far the idea of a referendum in Germany on the transfer of further sovereignty to Brussels, several voices are addressing the need of more citizen involvement in the process. "We can only overcome the crisis of legitimacy and confidence faced by European institutions with more citizen participation," told Horst Seehofer, of the conservative CSU, to Welt am Sonntag.
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