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This is Europe’s “Powerful” Plan?

by John Rubino on December 8, 2011 · 18 comments

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 spending 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.

  • http://www.stevebaird.ca Steve Baird

    Great summary John. The risk of disappointment over the summit is high. A pretty short time frame to come up with a workable solution. Lots of risk money moving to bonds today, even the weak hands in gold were shaking.

  • Jeremy Bridges

    Contrary to popular understanding this is NOT the Merkel Sarkozy show. There are as you have rightly said 27 Nations involved in this dog’s breakfast / shambles of a conference.
    For example the Dutch have absolutely rejected any further loss of sovereignty. It’s a non starter. The Irish will not countenance any interference with their 12.5% corporation tax nor any further loss of sovereignty. I could go on and on. It’s a massive cat fight both within the EZ and without. Ambrose Evans Pritchard writing in today’s London Daily Telegraph describes the current situation with his usual clarity:

    “Better a horrible end for Euroland or endless horror.”

    Take your pick.

    Which ever way it goes the Euro currency will fail and with it the EU. Thank God. Europe as a collectivity of Nation States will emerge this disastrous experiment and will grow and flourish

    God Bless everyone.

    Jez @ Chichester UK

  • http://www.adovationz.co.nz Digby

    I think the only way out for countries like Greece and Italy etc is to grow their way out. Increase exports, and GDP and that will provide the tax revue to start to balance their budgets.

    More austerity cut backs just makes things worse and worse, at least do it gradually.

    And what of US debt and money printing? Why is this ignored so much?

  • http://www.tomblairea.com Thomas Avery Blair

    Say, I have an idea that might put Europe back into balance: Why not sell the debtor states to the creditor states and make all the citizens of the debtor states nothing less than slave labor candidates for the creditor states? It almost worked for Hitler almost 70 years ago, but he went nuts and tackled Russia in the East and Great Britain in the West at the same time!

    But this time around, there would be little need for bloodshed by the millions. Instead, the fiscally-responsible nations would simply own, lock-stock-barrel the debtor states until their debts are paid in full…it probably wouldn’t take more than just two or three generations to accomplish the repayments through labor by all the citizens of the debtor nations.

    Debt is slavery to the debtor and ownership by the creditor…what other distinction really works in this situation?

    At least food for thought, is it not?

    At it just might fit nicely into the insights and prophecies one can read in the Book of Revelation in the New Testament!

  • paper is poverty

    There are some charts here that show what happened to stocks, the Euro, debt yields, etc. after the other ten EU summits this year: http://bit.ly/vxsn6r . Even the best of them didn’t do that much to reassure markets.

  • http://www.spiritjewelry.info RevSuzanne

    Looks like the Teutonic genie is out of the bottle. Germany is trying to require that anyone getting bailout money from them must turn over control of their economy to a German functionary to make sure it is run properly and will be able to pay Germany back their money. We now have the rise of a 4th Reich, only instead of soldiers, they’re using bankers.

  • brad thrasher

    good post JR!

  • Bruce C.

    The key statement in this piece that succinctly encapsulates both the problem and the solution in Europe is this:

    “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.”

    That is a classic, arrogant, elitist point of view that explicitly implies that central planning shall usurp the free market. Who do they think they are? The bondholders are absolutely the only ones who should bear the burden of loss and if governments are to be involved at all it should be only to enforce those contracts, not to run interference and protect the banks.

    Allowing, or forcing, losses onto bondholders would send the loudest, clearest, and most direct message to all future investors that doing business is risky, especially with craven governments. That knowledge and fear would be the most direct and reliable regulator of future foolish behavior too.

    I understand the claim that forcing losses on the banks would bankrupt them and ignite a financial crisis, etc., etc. – but that is only vested interest opinion. (Hey, it worked in the US in ’08). However, socializing those losses would be an unjust certainty with unpredictable consequences. Given that choice, I put my trust in the wisdom and justice of the free market.

  • Thomas

    You’d think that the press or some objective economist working to solve this problem would direct these participants to the key premise or fountainhead of the problem. What’s going wrong in Europe is the solutions given to the problem which has much in common with the solution.
    First, real or primary wealth is created out of the ground. Food, minerals, textiles, metal. Useful to the extent markets demand those products. Secondary wealth is moved via the service sectors. Government’s proper role in an economy which that government might desire to keep healthy consists of being the least burden to the cost of wealth possible while ensuring the enforcement of a legal structure to keep the wealth creation process moving.”
    The so called developed nations of Europe and North America have made their economies sick. The illness is evident in listlessness, lack of productive energy, low red blood cell count. Like doctors who could not fathom that their dirty hands were making patients sick in an earlier era, these doctors of the economy are arrogant to anyone not ‘familiar’ with the problem at hand. Just always understand the key here. Look around your rooms. Wealth, all real wealth, comes out of the ground. Not from lower interest rates; not from adjusting banks reserves requirments, certainly not by unjustified printing of fiat money. Until the ‘doctor’s understand their contribution to this sickness, the prognosis for recovery is not good.
    However it also requires putting the brakes on the very people designing the solution, that is to say, another failure.

  • Frank

    Bruce, you’re right on. You got guns? I hope so! And don’t forget, a houseful of guns is worthless unless you have two houses full of bullets.

  • Sue

    Bruce, you’re right on. You got guns? I hope so! And don’t forget, a houseful of guns is worthless unless you have two houses full of bullets.

  • Daniel de Paris

    Push on the good work. That’s a good post overall. However there are some points that could and should be challenged IMHO.

    May I quote this: “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.”.

    “a history of reciprocal invasion”

    I believe that this is a dated view of the “Old Continent”. Europe is an old-aged people continent with a relatively wise governance. This not 1938 Europe. Not even the 1955 one.

    Sure nothing is perfect here. But should you compare from a global perspective, Europe governance, in its current confederal way, is certainly not worse than Washington or Beijing.

    The risk of a political breakout, something an old bloke such as AEP from the Telegraph is calling from his UKIP perspective, are IMHO limited. And the internal debate on currency policy here is quite active and relatively sound.

    A lot of talk about “sound money” policy is taking place here in Europe. Even on very popular TV networks with Austrian views getting heard in some way.

    “varying attitudes about work versus leisure”

    I believe that you are “Cliché” as well on this. When European corporation have people accross Europe work together (I did participate more than once, that’s a regular setup here and not only on Airbus or in Brussels), it does not show.

    Varying attitudes to life, certainly so. Sometimes, very distinct social organisations. Varying attitudes toward the state for sure – and, correlatively expectations as in pension issues. But some solid cultural common ground. Even more so.

    Nothing perfect sure in Brussels. It’s a hell of a bureaucracy.

    Worse that current governance in Washington, Moscow or the current Beijing run into a banking crisis à la sovietique? I do not reckon this way.

    Mind you, the level of corruption is still relatively low in spite of the stakes. As compared to the alternatives I mentionned. And it is certainly not as slow-moving as some would anticipate for such a Ornithorhynchus-like construct.

    Nothing perfect. But certainly not worth the current bashing IMHO. By the way who tried to fool investors into believing the Euro was a DM-like currency? European people? Sure not. We never liked these exchange rates to the currencies of our friends in the US and Asia.

  • Jeremy Bridges

    Daniel de Paris: “Mind you the level of corruption is still relatively low” Pray tell me / explain why the EU’s auditors have refused to sign off the accounts for SEVENTEEN STRAIGHT YEARS. For the benefit of American readers..The EU Commission is venal and utterly corrupt. It protects itself by having passed legislation that makes its members immune from prosecution. Make of that what you will. Early this morning David Cameron – our Prime Minister said NO. The UK is isolated shrieked the leftist commentators at the BBC. In reality we have begun the process of urgently putting a deal of clear blue water between ourselves and the Titanic otherwise known as the Eurozone, and not a moment too soon.

  • Paul

    “Member states will be required to “incorporate debt brakes” into their constitutions.”

    I highly doubt that this would be in the constitutions. If so, many countries will need a referendum, and those obviously won’t pass. Once democracy gets involved, it’ll be over and out for all these fine plans.

  • http://www.tradingclearly.com dangerousdave

    The Europeans have a plan??? I thought they were just winging it?

  • frederick muhlbauer

    how do you spell deflationary BLACK HOLE

  • avatar singh

    i have been warning for years that england is a parasite on europe which msut be removed forcibly otherwise english pirates will destroy euro and europe.
    August 2002

    It really is funny when the english media start telling to all and sundry that while it may be that U.S. has some reason to lose shares in the stock market and while the rest of world has lost stock market for so long it is some special god given right of london stock market not to fall or atleast not to fall as others have. Why?thses english propagandist who have been champion of globalization and have told others country that evrything in one country affects other country(though not aparently england even if england produces nothing of sort and her so called service industry is run by constipated looking arse faced low lif salesman and women), ; these people are now saying that england’s accounting system and stock market is different than americas. Till other days they have been telling that their system is best because it is very much like american system.
    Whole thing smacks of rats(in this case british) leaving the ship(america) when the rats fear of ship sinking.After it ion the strenght of american power that this thrid rate country called england has had such a boom time while the real industrial giants like japan and Germany have been in recession for years(no globalizatio effect there).In fact poplke should throw their economic book ab=nd theory and examine how a thrid rate country like england has nbeen able to survuive let alone propsper.ofcourse the english were fisrt to glee when they initaited downfall of japanese and far east market-no advice at that time to put money into equity as good value as they talk of in their case now. The english spies in form of jopurnalist put a lot (billion) of false paper money into Soviet russia during may-december 1900 to bankrupt soviets. ofcourse the englsh have been trying to thwart Euro for a long time-only when they are successful then they think of joining eueo-in fact europe should not allow britian to join euro.Also english media and govt. have been indulging in industrial sabotage of european countries thru the anglosaxon network of satellite and net , telephone spying and tapping-even E.U. rightly had complained about it-it was hushed just as it was in case of money laundering by british through their so called tax heaven off shore islands.
    In fact for last 20 years and more so in last 15 years the english have shown their true clour-after cold war it is clear that the impotent english have been trying to piggy back pon american strength(americans in majority are not anglosaxons)and thru america england treis to bully other nations-install dictators their and then those dictators without peoples supprt are asked to bring the money to england and buy house in london-that creates housing boom and this nation of plumbers(graduation from pirates to shopkeepers then plumbers now) feels very happy with inflated house prices and low qulaity housing and infrastructrue-the money from abroad comes to london stock exchange and fuels the stock price. The london stock price should be forced to be lowered to one fourth of its present price becasue the rest is all false pumped up price with no real value. wht does england produce that any country would want? the real indutrial nations of the worls -Japan, germany have been in recesssion for last 10years while this england has been booming after gulf war for no reason other than becasue it falsley persuaded other countries and their dicataors to bring money to london and starve the rest of worrld. For God’ sake the english plumber does not even eat healthy food.–atleast not non infected.england -which has preached globalization to evryone-must be forced to import better and healtheir food from other countries and make british farmers go to heaps because they desrve to be finished.After imf has ruined many farmers in the rest of world so what is special about dirty smelly british famers who produce infected smelly industrial food fit for pigs like the british farmers.

    the accounting system and evrything in england is reeling with corruption with collusion amongst government, media and business class -inflitrating academia even and polluting every thing in the socail ,ecnomic and political field of this pirate turned shopkeeprs turned plumber country.In fact the corruption is so widespread that the stock market is not worth even ft100index of 1000 let alone 4000. The world must force the london stock market to fall below 1000 and more-first the dictator countries of the world and others must take money out from here and get it in some other country-though england have 98 percent market of off shore tax heaven for corrupt and money lanudered money there is no reason why england can not be forced to obey civilized laws just as the rest of world does and close all money laundery business through tax heavens.

  • avatar singh

    still relevant today

    1999.

    Recently a reputed French National paper ”le Figaro” in its 6th March ,’99 edition mentioned two different things but connected by important observation. First was that an american pilote who had caused killing of so many tourists in Italian tourist place by his cavaliar attitude , had been acqueitted of all crimes by American court at the same week when two German s had been put to death in state of Arizona in state prison despite of Germans’ protest and in violation of international law. It was against international law because though the Americans had captured thse two German brothers way back in 1982 and put them to prison, thae had not informed the German authorities untill it leaked out only recently and only when death sentence had to be executed. Compare that with the royal treatment given to british girl-a maid servant_ when she killed an American baby born of Indian father and when murder case was first changed to manslaugher and then despite only mandatory 15 years’ minimum sentence: the judge gave a pronouncement-alredy preknown to british propaganda media like b.b.c.-that that murderer girl should be released fothwith.Compare that with british propaganda departments like b.b.b. and others of theat lot moving their commentators to States for whipping up hatred against Simpson and thier disappointment at verdict; not only that british propaganda dept. has been very active in pushing for severe punitive mesures in u.S.A. against Blacks in name of crime or drugs. The same british media who is very armourous of anglo-american tobacco company-biggest drug dealer in the world. It should open eyes of the world and of Americans (majority of who are not ‘anglos’) about infiltration in American foreign, Domestic ,economic and juridiciary of British agents who are nurtured there by mainly racists people of south and who are doing harm to american interests at the benefit of british interests. Britain has undually benefitted from recent incresd stature of America because britain is a parasite on not only America but the whole world. It is not unsignificant that after Gatt and so called globalization under auspices of IMF(which had been created solely to benefit britain in 40′s) the whole world is in deep recession except Anglosaxon countries especially u.s.a.and britain. That is when britain is not an industrial country-it does not not produce anything which others may want -but others are forced to buy rubbish low quality high priced british goods like kuwait and saudie arabia are forced to buy.While britain protects its own jobs by buying even rotten,viral infected beef and spurious drugs and a lot of rubbish low quality domestic products; it forces with the help of u.s.a.; other countries to destroy thier own economy and domestic industry.IT is very strange that even after so called crisis of Japan, the unemployment figure in Japan is 4 % , bank rate is 0.15% (yes you heard right) and export record level ; while American trade deficiet is record high but growth is 5% in three months at base rate of 4%! All this theory of export being growth engine is more false when you consider that Germany has had record export of all time and 25% of German’s domestic product is exported but country has record recssion at the moment. In other word the whole world has been subjected to immense fraud and destruction by anglosaxon race in name of gatt; in name of nato and what not.

    On the same day the aforementioned French paper mentioned that In since First world war, United States Congress has imposed trade and economic sanctions against foreign countries record 60 times and of this , half in las 5 Years! If you consider numer of times done in last 10 years then it comes to 75 5 of all sansctions have been done after break up of Russia. In other word the more America got bold after gulf war, the more countries were forced under its dictatorship. Today more than 50 % of world’s countries are under America’s economic sanction! Ofcourse it does not attack all at once. When enemy(which for america is all non anglosaxon counties) is wek it choose one by one. ANd the victim counties have also themsemlves to blame. If these 50 % of world’s countries had the guts they would have boycotted american and anglosaxon goods and change over from dollar to EURO as means of foreign payment. BUt these countries rulers are american gaents and thy want to deliver thier country to america.


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