Financial markets rallied Friday after the EU summit produced an "intergovernment" agreement designed to impose tighter budget rules on member states, as well as 200 billion euros (about $270 billion) for the IMF's bailout fund.
All 17 nations in the eurozone signed the agreement, which calls for "automatic consequences" against nations that breach deficit targets, and 23 of 27 EU members signed on as well.
"It is a very good outcome for euro area members and it's going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries," European Central Bank president Mario Draghi said of the agreement.
But just as traders found the ECB wanting on Thursday, enthusiasm for the EU package Friday was tempered by Britain's refusal to sign the agreement, which itself is not the "grand bargain" treaty change many had hoped for at the beginning of the week. In addition, Germany Angela Merkel rejected plans to combine the temporary European Financial Stability Facility (EFSF) with the permanent European Stability Mechanism (ESM), a proposal that would have created one bailout fund with over $1 trillion of firepower. Germany also ruled out granting the EFSF a banking license, which would have allowed it to draw funds from the ECB, AFP reports.
For now, the market seems inclined to give the Europeans the benefit of the doubt and actions this week by the EU and ECB do seem to have alleviated concerns about an imminent crisis, which is bullish -- at least for the short-term. As 2011 heads into the home stretch, performance anxiety among money managers could very well spur a 'Santa Claus' rally, perhaps even something of magnitude. In recent trading, the Dow was up 1.3%.
But the medium-term outlook for Europe is bearish "for sure," says Mark Dow, a senior portfolio manager at Pharo Management, a global macro hedge fund with about $3.5 billion of assets.
"I don't think we're done [with the crisis] by any means," says Dow, a former IMF staff economist. Europe is "like the drowning man who bobs up to the surface a number of times before he goes down for good."
Comparing EU policymakers to a mechanic who fixes the engine on a car with faulty breaks, Dow says the big issue in Europe isn't fiscal discipline - with the exception of Greece, he says EU members have made a lot of budget progress in recent years - or the presumed lack of leadership and political will. "It's a problem of design," he says. "The single currency just doesn't work with countries that disparate...it's just unsustainable."
If Dow's right, all the kings horses and all the king's men won't be able to put the Europe's grand experiment back together again -- but that doesn't mean they won't keep trying.