By contrast, Europe has fallen down the list of pressing issues, as evidenced by the continued tightening in peripheral debt spreads.
Recent political developments in France and Italy however, show the strains which are already beginning to appear in the Fiscal Compact, an agreement hammered out in those turbulent weeks of late 2011, when it seemed that the German Chancellor Merkel was on an endless round of emergency summits, attempting to save the euro from collapse. This new agreement was seen as a much more robust replacement for the earlier Stability and Growth Pact.
Diverse monetary union
Two years on, this pan-euro agreement on budget discipline has come up against the political reality that this is a monetary union of many and varied electorates, who may not wish to endure the austerity measures deemed necessary to achieve the 3% budget deficit target.
With a deficit in excess of 4% of GDP and having already been granted slippage on progress to the target, the French government, fresh from a drubbing in the polls, are likely to ask for more time. Meanwhile the new Italian PM appears to have downgraded the importance of the deficit constraint, opting instead for a mixture of tax cuts and those ever elusive "labour market reforms", in an attempt to kick-start a moribund economy.
Of course, the real reason why governments feel more relaxed about fiscal slippage is that the ECB has helped to create the conditions for lower bond yields. In the long term, there is a danger that solutions which appear to hold the euro together make eventual break-up more, rather than less likely, since the fall in bond yields means less pressure to undertake the reforms necessary to create a more optimal currency union.
Ian Kernohan is economist at Royal London Asset Management
