06/29/2012 05:44 EDT | Updated 08/29/2012 05:12 EDT

What Italy's Victory Over Germany Really Means


Unless they are living in Canada, there isn't going to be much for Germans to celebrate this coming weekend on a few accounts. For one, the country lost against Italy in the Euro 2012 semi-finals in what must have felt like a bitter defeat after Germany had knocked out those fiscally silly Greeks the other week. The last time round, Germany advanced to the finals, only to be beaten by Spain -- the country that Italy will face in the finals this weekend.

The irony will not be lost on those who have been watching the Eurozone financial crisis play out in recent weeks. Germany's Chancellor Angela Merkel has been steadfast in her opposition to a plan for a common debt issuance program (so-called "euro bonds"), while her electorate have turned up their collective noses to calls for additional handouts to the problem centres like Greece.

This opposition has underscored the concern in global capital markets that the whole euro project might just collapse in on itself without a coordinated effort to backstop the region's banks and bring about true fiscal reform. In the face of Germany's opposition, countries like France, Spain and Italy have not only pushed the agenda for less austere fiscal timelines, but for short-term growth enhancing measures as well.

As we head into the long weekend, a significant turn of events has materialized out of the EU leaders' summit. Specifically, these same three counterweights were able to secure agreement to give member countries the ability to tap directly into the European Stabilization Mechanism (ESM) for capital to support their banks without having to resort to deficit financing and issuing sovereign bonds. The decision is timely in that the ESM comes into force in July, but already it has reduced the level of tension in Spanish and Italian bond markets. In addition, EU leaders are on their way to crafting a unified banking supervision model, though the road towards a shared debt issuance model remains long and winding.

Perhaps most significant out of this summit is the shift in political dynamics. From a climate where Germany dominated the agenda and was cast in a negative light among those countries coming to the bailout trough, Europe now appears to be coming together. From the perspective of making real progress towards a fiscal and monetary union, this development goes beyond just the measures announced from the summit.

That's not to say that Germany is no longer critical to success. One of the problems it faces in the future are the upcoming Germany elections in 2013. Considering the rise of pro-nationalist parties across the region, nailing down agreements on the unified banking model and some form of common debt platform has to happen sooner than later.

For now, the markets are giving EU leaders the benefit of the doubt, as witnessed in the surge in equities on the last trading day of this quarter. For sure, there will be a lot of national pride on the line in Italy and Spain during this weekend's Euro 2012 final; however, from a financial standpoint, both secured a win against Germany into the game.