6/29/12 12:02 PM – Good News from Europe

According to CNBC, “It was also agreed that a single supervisory body for euro zone banks, housed under the European Central Bank, would be created by year’s end—much faster than previously envisaged.”

Future bailouts will not come with austerity measures, a nod to the recession that nearly all of Europe is experiencing.

Loans to troubled banks will come directly from the ECB, not through the government for the country in which the bank is located. This keeps those governments from being loaded with even more debt as is true under the system for bank bailouts.

In response, bond markets in Spain and Italy rallied sharply, bringing down interest rates on sovereign debt. European stock markets shot up more than 3% on the day. The US market is up nearly 2%. Banks are the best performers, as you would expect on this news.

Long-term, the bank measures are a step toward greater unification in Europe. First came many common regulations, the falling of trade barriers, then the common currency, a central bank, a common bank supervisor and probably then joint European government bonds replacing bonds from individual countries.

The final step, control over politicians and their spending will be far the hardest and may cost the Eurozone some members. That is the heart of the problem and might require a more intense crisis or even a war, remote as that possibility seems now. I see a long time (years) spent muddling through.