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Europe's
leaders have convened another summit meeting that will, they promise, put all
the break-up speculation to bed once and for all. But the ideas that were
floated pre-meeting are, um, logically challenged. Consider this excerpt from
a recent Wall Street Journal article:
The Pitfalls of Merkozy's
Third Way
...Perhaps
the markets are simply relieved that the two leaders have come to any
agreement at all, given how far apart they have been throughout the crisis on
key political questions. Of the two, Mrs. Merkel has given the most ground.
Both sides have agreed to toughen the euro zone's fiscal rules with automatic
fines for transgressors. But Berlin had wanted the rules to be policed by a
supra-national body such as the European Commission or the European Court of
Justice. Instead, Mr. Sarkozy has prevailed: Responsibility for maintaining
discipline will remain with member states, each of which will be required to
incorporate debt brakes into their constitutions. The ECJ's role will be
limited to ruling whether so-called Golden Rules comply with the European Treaty,
while any sanctions will remain the responsibility of the European Council,
voting by qualified majority.
Whether this
will be enough to persuade the ECB to act depends partly on whether the ECB
considers the euro zone's financial situation to be so desperate that it is
willing to overlook the clear flaws in this plan. After all, the new
fiscal-discipline framework isn't so very different from the old stability
and growth pact that proved so disastrously ineffective. The ECB might
question whether it reduces moral hazard since national parliaments will
still have the final say on budgets. There is no mechanism to force states to
stick to reform programs once market pressure eases. Countries already
struggling to implement austerity may not be sufficiently susceptible to the
threat of sanctions.
More
importantly, the new plan appears vague on how the euro zone will respond if
another member state's debts prove unsustainable--a crucial question given
the deterioration in the euro-zone economy. The two leaders said there would
be no further bondholder losses, and Mrs. Merkel agreed to drop her demand
that bondholders share the burden of future bailouts. Yet there is no plan to
create euro bonds backed by a properly funded central authority able to make fiscal
transfers to overindebted regions. Whatever the
short-term relief as a result of deals reached this week, this is one major
weakness in the latest plan the market may try to test before too long.
A recap with comments:
Member states
will be required to "incorporate debt brakes" into their
constitutions. Which sounds a bit like the balanced budget
amendment that even US conservatives find too potentially onerous to pass.
Countries
that borrow too much will be hit with automatic fines. But...if a country
can't pay its bills, how will adding another bill to the pile improve its
situation?
There will be
no Euro-zone super-agency with enforcement powers. Each country will be in
charge of its own finances. So Italy gets to manage its own pension
plans...that should work out just fine.
As WSJ notes,
the above sounds a lot like the Euro-zone's original Maastricht treaty --
which is still theoretically in force. Among other things, it requires
signatories to keep their deficits within 3% of GDP and doesn't include a
supra-national enforcement mechanism.
And it's
still not clear how a highly-indebted country can cut its deficit without
either devaluing its currency or slowing its economy. The latter would be the
result under a stable euro regime, which would mean a recession, more
borrowing and therefore more deficit cuts, right down to the point where
wages are competitive with China and Vietnam. Is there any group of Europeans
who would placidly accept that kind of lifestyle death spiral? The answer is
probably no, which is leading some German officials to backpedal:
Germany pours cold water on EU summit hopes
PARIS/BERLIN
(Reuters) - Pessimistic comments from EU paymaster Germany and new figures
exposing deepening stress among Europe's banks dented financial market hopes
of a turning point in the euro zone's debt crisis at a summit this week.
President
Nicolas Sarkozy and Chancellor Angela Merkel detailed their plan to amend the
EU treaty to anchor stricter budget discipline in the euro area in a letter
to European Council President Herman Van Rompuy on Wednesday.
The French
finance minister said the leaders of France and Germany would not leave
Friday's European Union summit until a "powerful" deal is reached
to restore market trust and prevent the sovereign debt crisis spiraling out
of control. But while Paris voiced determination, a senior German official
gave a downbeat assessment of prospects for an agreement in an apparent
effort to jolt partners into accepting Berlin's terms and respecting its red
lines.
"I have
to say today, on Wednesday, that I am more pessimistic than last week about
reaching an overall deal ... A lot of protagonists still have not understood
how serious the situation is," the official told a pre-summit briefing.
"My
pessimism stems from the overall picture that I see at this point, in which
institutions and member states will have to move on many points to make
possible the new treaty rules that we are aiming for," he said, speaking
on condition of anonymity.
Some final thoughts:
The Europe
that its elites envision looks like soft version of the US -- but with a
balanced budget amendment.
You don't
have to be a conspiracy theorist to believe that the creators of the
Euro-zone wanted just such a union but knew they'd need an existential crisis
to make it palatable. Whether by design or chance, they now have their
crisis.
But even with
the common currency imploding, a "fiscal union" with
constitutionally limited borrowing power -- policed by Germany! -- is a
serious challenge for a group of countries with multiple languages, varying
attitudes about work versus leisure, and a history of reciprocal invasion.
So by Friday
night they'll have a plan, because they have to. But the odds of something
that creates a United States of Europe in very short order seem pretty slim.
Meanwhile, the market's reaction to anything less might be apocalyptic. Looks
like another sleepless weekend for hedge funds and politicians.
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