Brussels bailout: markets must keep the faith

A WEEK after the big Brussels bailout and its huge impact is becoming increasingly obvious. This time last week we watched in disbelief as the Eurozone, EU and IMF collectively did what the international markets never thought they had the stomach, pockets or political will to do – shock and awe, Tarp-style.

Investors (by way of lower demand for peripheral European sovereign debt) were asking the Eurozone an important question – what happens if a member state can’t pay its debts? Will the rest of the Eurozone stand behind them? It may have seemed to European politicians like they were being picked on but this was a legitimate question for investors to ask.

Ever since the birth of the euro there have been concerns about how it is possible to run a monetary union without fiscal union. Last week marked an important watershed. Not full fiscal union, of course, but much closer political ties. Investors now know that German and other governments will step in rather than let Eurozone members default.

Despite this giant leap toward pan-European centralisation lots of investors say the bailout has failed because the euro has since weakened. But this effort was designed to save the single currency for the long term, not prop up its short-term value. Spreading peripheral debt default risk around the Eurozone was bound to result in currency weakness. This will provide a much-needed boost to exports.

Lots of commentators say the bailout is a sticking plaster approach. Yes, but Europe’s economy just bought some breathing space and a big opportunity for structural reform. It is not fair to say the bailout failed because it didn’t suddenly make Europe more competitive and tackle a bloated state. Economists at RBS said this week they expect the Eurozone to embark on a big overhaul of its fiscal policy that could result in the removal of fiscal sovereignty from member states. If Germany is borrowing money on behalf of the periphery then Berlin is going to preach (and demand) austerity and reform in return. All markets have to do is keep the faith. Anna Edwards co-anchors Capital Connection weekdays on CNBC. Check out