ECM’s Vanbrabant looks to the future of Europe’s labour market

Jens Vanbrabant, portfolio manager at Wells Fargo company ECM, the specialist multi-asset traditional and alternative credit manager, sees European labour market reform as a long and winding road

At 4.30 CET this morning (29 June) Europe’s leaders at the summit released a statement that contained slightly more progress than expected by financial markets. Two major compromises have been agreed between creditor and debtor nations.

Firstly, the agreement on ECB-led joint banking supervision by the end of 2012 led to a commitment to allow direct bank recapitalisations through the ESM. This arrangement has the potential to break the negative feedback loop between government and banks since it means that the ESM support funds for banks will not raise government debt burdens.

Secondly, following a game of brinkmanship between Italy, Spain and France, the “Compact for Growth and Jobs” was approved in exchange for concessions from Germany that allow EFSF/ESM funds to be used for the benefit of Italy and Spain without additional austerity beyond what has already been pledged to the EU (“conditionality-lite”). In other developments, it was formally confirmed that Spain’s support loans will not have preferred creditor status and that Ireland’s banks and government may get further help along the same principles as Spain.

At the time of writing, the summit is ongoing and further details – particularly on the four Presidents’ proposal containing a roadmap towards fiscal integration published earlier this week – can be expected later today. So far both equity and credit markets have reacted positively to developments at the summit (the €Stoxx50 index is up 2.1%, the iTraxx Crossover index 25bps tighter at 675 and Spanish and Italian 10-year government bond yields dropped 30 and 20bps respectively) but we will analyse the summit’s outcome more comprehensively in next week’s commentary when all the facts are available.

In the remainder of this week’s article we will take a closer look at European labour market reforms, a key component of the Growth Compact. We will review what has been achieved so far and what remains to be done by Germany and Europe’s weaker states in terms of modernising their respective labour markets. What do segmentation, wage rigidity, and inflexible working conditions mean in practice and how are governments trying to address these issues?

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