Last week we witnessed both the European Commision and Merkozy state that the direction forward for Europe required greater loss of fiscal sovereignty by Euro-Zone member states.
From the European commission:
The European Union demanded Wednesday sweeping powers to override national budgets and proposed issuing joint eurozone bonds to help resolve and prevent a repeat of the debt crisis.
“Without stronger governance, it will be difficult if not impossible to sustain the common currency,” EU Commission chief Jose Manuel Barroso said of his latest legislative proposals.
The head of the executive EU arm, Barroso presented radical plans that would allow him and Economy Commissioner Olli Rehn to decide to intervene in national policymaking.
And from Merkozy:
.. leaders didn’t spell out what kinds of changes are in the pipeline. However, they said they will present a plan ahead of the next European Council meeting Dec. 9, including proposals to grant Brussels oversight and disciplinary powers over national budgets that exceed euro treaty restrictions on public debt and deficits.
If taken out of context you may have got the idea that this was a co-ordinated effort and the beginnings of a new “master plan”, however as usual in Europe the reality seems quite different. Germany’s response to the EU Commission’s other idea has been anything but supportive:
German Vice Chancellor Philipp Roesler on Saturday called a proposal by the European Commission last week for joint debt issuance “irresponsible” and said Berlin will remain firm in its rejection of euro zone bonds.
Roesler, also Economy Minister, said in a radio interview that European Commission President Jose Manuel Barroso made a mistake last week by suggesting euro zone bonds could be issued once new, intrusive laws to ensure budgets of euro zone countries do not break EU rules are in place.
“I find it irresponsible of Mr. Barroso to re-open this discussion on euro zone bonds again,” Roesler told Berlin’s InfoRadio network, using language that went beyond Chancellor Angela Merkel’s term “extraordinarily inappropriate.”
This is nothing new. Germany has stated for many months that discussions of supra-European financial instruments are premature, and until other nations have agreed to give up some rights over their fiscal sovereignty Germany will not enter into discussions. I have never thought that meant they were against them, just that until they had tighter control over other nations finances they were not willing to risk their own. I mentioned a few weeks ago that Germany seemed to be positioning itself for tighter integration by allowing nations who do not agree to these terms to leave the euro.
It would appear that more work is being done to move things in that direction:
Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe’s leaders race to convince investors they can resolve the region’s debt crisis and keep the currency area from fracturing.
Under the proposed plan, national governments would seal bilateral agreements that wouldn’t take as long as a cumbersome change to European Union treaties, according to people familiar with the matter. Some German and French officials fear that an EU treaty change could take far too long. That has prompted the search for a faster option.
The plan, which hasn’t been finalized, would allow the euro zone to announce a speedy change to its governance. European authorities would gain tough new powers to enforce fiscal discipline in the 17 countries that make up the euro zone, the people said. EU treaty changes could then follow at a later stage.
At this stage it is hard to tell if this story is anything more than a rumour that was released on the weekend in an attempt to front-run the markets after Belguim’s downgrade. I could wonder the same about the rumoured IMF plan for Italy given the horrible auction they had on Friday. I am also not sure how bilateral ( meaning two way ) agreement could speed up this process given you would need over a hundred to cover every country agreeing with each other in this way. But given the recent melt-down in European bond markets, this may well be framed in the context of “join us or be left to fend for yourself, make a choice”.
It is very easy to be sceptical given the previous failures and long-winded politicking that took place around arrangements that appeared far less important that this one. I do, however, find it remarkable that such a change could be suggested without the need for a people’s referendum from member nations, but this wouldn’t be the first time I would have been surprised by Europe’s lack of democracy. However that is not my major concern with this latest development if it turns out to be more than just another rumour. My real issue is what exactly they would hope to achieve.
If the current stability pact is left in place then as far as I can tell this is simply a plan to allow some governing body the right to force austerity on every country across Europe except Estonia, Finland and Luxembourg. I would hope that we would see something greater but, since as yet I have not witnessed a single person within the European bureaucracy acknowledge that austerity has failed to bring about economic stability, I will not be holding my breath.
The latest news from Greece demonstrates once again just how ridiculously badly the entire process has gone:
Greece may miss its target for privatisation revenues next year because of the worsening economic climate in Europe, the head of the agency responsible for selling state assets said in an interview to be published on Sunday.
Greece’s repeated failure to meet budget targets including for privatisation revenues has angered international lenders, raising questions about whether they will continue indefinitely to keep the country afloat with bailout loans.
Forced austerity across the entire European continent will lead to a global depression. If this does turn out to be the plan, then “go long ammo”.
I am, however, a little doubtful it will come to that. I mentioned last week that I wouldn’t be surprised to see some changes to treaties in order to stop France and Germany looking so hypocritical in their moral attacks on the periphery. France is looking extremely vulnerable at present, and I have little doubt the country’s officials are attempting to get themselves some sort of special deal given how desperate the country seems to be becoming:
Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.
Discussions are taking place against a backdrop of flagging market confidence in the region’s debt and as part of wider negotiations over introducing stricter fiscal rules to the EU treaty.
Euro zone powerhouse Germany is insisting on tighter budgets and private sector involvement in bailouts as a precondition for deeper economic integration among euro zone countries.
Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.
But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) – the permanent facility scheduled to start operating from July 2013 – could be withdrawn, with the majority of euro zone states now opposed to them.
The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.
“France, Italy, Spain and all the peripherals” are in favor of removing the clauses.
At least Reuters has finally realised that France is a peripheral.
Finally, there is another rather large problem with this rumour/plan. Best described in this picture (you can find the other 19 banks here):
There is nothing in this current rumour/plan to address the ever-growing European banking crisis that will only be made worse by increased austerity. Getting countries to hand over their economies is one thing, fixing them is a far greater problem.