The European Union leaders have finally given a glimmer of hope to the world’s economy by pledging to support Spain and Italy’s banking system. The deal between the leaders on Friday 29^th also unveiled the long expected growth compact which focuses on encouraging economic growth rather than forcing austerity as a precondition for aid. Realizing the high government deficit in countries such as Spain and Italy, the EU leaders have also decided that the ECB will lend directly to banks under the European Stability Management (ESM), and enforce tighter lending measures to curtail bad loans. While the move has been welcomed across all markets, including commodity markets, people are questioning whether the move will now have any consequences to help the flagging world economy.

The problem with the EU economy goes deeper than just their banking problem. Although the latest decision helps build confidence and marks a first step towards a stronger European Central Bank, simply providing additional debt to debt ridden countries could make the situation worse. According to some analyst, Germany has been the biggest loser in this deal since they need to provide most of the liquidity to the ESM. If the current measures fail to help Spain, it is unlikely that more money will be available for further bank bail-outs. Governments in most European economy have to pay a premium to borrow money, and if things don’t improve despite ECB’s measures, the costs are likely to climb even higher.

Commodity prices have already lost most of the price momentum following the news and despite hopeful signs from the EU prices are most likely to remain depressed. Data from the United States and China are still very bad and is therefore unlikely to help commodity prices further. Solving the Euro Zone crisis is the first step to a global recovery. However, investors should not view more money being pumped into Spain and Italy as great news. The potential for an EU breakup still exists and as of now, the money lent through ESM is simply buying more time and hoping that things get better.