Surprise! EU leaders produce little of substance at summit

[ASH]

I'm probably being way too simplistic about this, but my naive assumption is that since there's basically nothing in here about substantial new money to backstop peripheral sovereign bonds (no Eurobonds, no expansion of ESM, and no authorization for ESM to behave as a bank) -- and since Draghi nixed speculation about major purchases of sovereign bonds or laundering ECB loans through the IMF -- Italy "ought" to experience a sudden stop. I wonder what will actually happen...

From Reuters:

(Reuters) - EU leaders agreed stricter budget rules for the euro zone on Friday, but failed to secure changes to the EU treaty among all 27 member states, meaning a deal will instead have to involve just euro zone states and any others that want to join.

After 10 hours of talks there was little concrete progress among the leaders, apart from their commitment to work towards a new "fiscal compact" -- the term used for a tougher deficit and debt regime to insulate the euro zone against the debt crisis.

...

It was decided that the ESM's capacity would be capped at 500 billion euros ($666 billion), less than had been suggested was possible before the summit, and that the facility would not get a banking license, as Van Rompuy originally had proposed.

It also was agreed that EU countries would provide up to 200 billion euros in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with 150 billion euros of the total coming from the euro zone countries.

Here's what I found reported about some of the specific provisions:

- Euro zone states' budgets should be balanced or in surplus.

- Such a rule will also be introduced in euro zone member states' own national legal systems; they must report national debt issuance plans in advance.

- As soon as a euro member state is in breach of the three percent deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of euro states is opposed.

- The European Stability Mechanism (ESM), the euro zone's permanent bailout fund, is aimed to enter into force in July 2012; the existing European Financial Stability Facility (EFSF) will remain active until mid-2013. The overall ceiling of the EFSF/ESM of €500bn will be reviewed in March 2012.

- Euro area and other EU states will confirm within 10 days the provision of funds to the IMF of up to 200 billion euros in the form of bilateral loans to help it deal with the crisis.

- Voting rules in the ESM will be changed to allow decisions by qualified majority of 85 percent in emergencies, although that remains subject to confirmation by the Finnish parliament

[jk]

Re: Surprise! EU leaders produce little of substance at summit

i think the fiscal rules will prove unworkable, but the most interesting part for me is that this is potentially a step towards pushing the uk out of the eu.

[we_are_toast]

Re: Surprise! EU leaders produce little of substance at summit

I thought disasters were all meant to happen over the weekend? Somehow, in Brussels, EU leaders have contrived to pull defeat out of the jaws of victory on Thursday night, leaving Friday for finger-pointing and recriminations and wondering whether anybody who signed on to this deal has any chance at all of even getting re-elected, let alone being remembered as one of the leaders who saved the euro.

Remember how Wolfgang Münchau said that the Euro zone had to get it right at this summit or it would collapse? Well, the Euro zone has most emphatically not got it right. Take any of the list of prescriptions of the minimum necessary right now — from Münchau, from Larry Summers, from Mohamed El-Erian — and the one thing that jumps out at you, especially in light of the most recent news, is that if you look at anybody’s list, there’s an enormous number of items which has zero chance of actually happening.

Here’s how the FT put it on Wednesday:

It borders on hysterical to say there are but hours to save the euro, but there is a risk that if the crisis is not now tamed the price of a rescue might start to spiral out of politicians’ grasp. The stakes are therefore very high at Friday’s summit. The world cannot afford another half-baked solution.
...

http://blogs.reuters.com/felix-salmo...strous-summit/

Apparently others share a lack of enthusiasm for this agreement.

[Prazak]

Re: Surprise! EU leaders produce little of substance at summit

It reads like a statement of wishes, or fantasies, than anything realistic. It amazes me that the European bourses seemed to bounce upward on this claptrap. And JK, this goes to the point you made in the other thread on Europe's crisis, that these things take much longer to play out than we in our modern lives lived at a much faster pace imagine would be the case. I think part of the incredulity, aside from the conditioned compression of our attention spans, is watching how irrational markets behave. It's like the old Peanuts comic strip where Charlie Brown continuously allowed himself to be deluded into thinking Lucy would finally hold the football for him to kick, notwithstanding all experience and evidence to the contrary.

How many of these summit declarations will markets continue to buy?

[unlucky]

Re: Surprise! EU leaders produce little of substance at summit

Perhaps the significant thing is what happened just before the summit, i.e. Germany and France announced there will be no more hair cuts for government bond holders. Every burst of contagion we have seen so far was triggered by the escalating threats of imposing losses on bond holders, and finally the reality of losses for holders of Greek debt.

The summit itself was really about what Germany got for taking PSI off the table. Not a hell of a lot. So, stocks are up!

At least that's one reading of it. Holders of Italian debt are probably happy enough to wait and see if Germany and France can make good on their promise.

[c1ue]

Re: Surprise! EU leaders produce little of substance at summit

You're forgetting that the owners of this debt are largely European.

Franco-German banks forcing default on PIIGS isn't going to get them their money, whereas prolonging the crisis in the hopes of a ECB printing run might.

The situation in Japan is similar: despite the massive Japanese debt, the fact that it is owned by Japanese via the Japan Postal Bank proxy means it is extremely unlikely a default would be pushed for by Japan's creditors.

[unlucky]

Re: Surprise! EU leaders produce little of substance at summit

The Financial Times suggests that the end of PSI plus the new liquidity provisions from the ECB might be part of a plan to get Euro-area banks to buy more debt:

Friday’s summit declared that there will be no more haircuts on sovereign debt. So if banks can get three-year ECB money at 1 per cent and buy Italian bonds at 6 per cent, this could help cut debt costs while bringing seemingly risk-free returns. This is not contrary to European rules and it could be in both parties’ interests.

The end of PSI would also allow e.g. Italy to access bail-out funds (insufficient as they may be) without automatics losses for bondholders. So while the bail-out funds have not been increased, access to them has been made easier.

[oddlots]

Re: Surprise! EU leaders produce little of substance at summit

Ambrose Evans-Pritchard seems to agree, though you'd never know it from the piece's opening:

http://www.telegraph.co.uk/finance/f...reaty-law.html

What the ECB can do is pull out all the stops to save Euroland’s €23 trillion banking system, and that is what it did last week by extending unlimited credit to banks (LTRO’s) to three years, halving the reserve ratio to 1pc, and relaxing collateral rules to allow banks running out of eligible "kit" to pawn almost anything at Frankfurt’s lending window.
This is the closest we have come a "game-changer" in two years of rolling crisis. The banks can play the "carry trade", borrowing at 1pc until 2015 with gearing to buy Italian debt at 6.4pc. That is how you rebuild a shattered banking system, and how to finance governments covertly without breaching any Treaty clause.
The ECB at last has a chief who knows what he is doing, if it is not too late already to reverse the policy errors of the last eighteen months and halt the credit crunch destroying Club Med.

But if he gives this grudging assessment of the latest efforts he's scathing on the philosophy behind it:

But no monetary magician can conjure away the 30pc exchange rate misalignment between North and South that has evolved over fifteen years, leaving half Europe in a ruinous trap, unable to earn their way in EMU.
The victims are already lurching into the second downward leg of the Long Slump, but this time from a much higher base of unemployment. The jobless rate hit 22.8pc in Spain in October (Eurostat), compared to 9pc when the trouble began in mid-2008; or 18pc in Greece from 8pc.
Mercantilist Germany is at an entirely different stage of the long-term job cycle at 5.5pc, the lowest in 20 years. That is all you need to know to understand EMU is unworkable.
This is not at root a debt crisis. By endorsing fiscal fetishism, EU leaders are silently colluding in the Neo-Calvinist illusion that budget excess caused the debacle. They know this to be untrue. Ireland ran surpluses for years, reducing its public debt to 12pc of GDP at one stage (Germany is 82pc). Spain ran a surplus of 2pc of GDP. Italy has long had a primary surplus.
It is a trade and capital flow crisis, a regional variant of the US-China imbalance. The damage was hidden during the boom by cheap German, Dutch, and French capital -- and cheap Asian and Mid-East capital rotated through London banks -- flowing into southern Europe. It was cruelly exposed as soon as creditors shut off credit.
Call it the Latin trade deficit if you want to rebuke "sinners", or the Teutonic trade surplus if you want to rebuke "predators". It makes no difference in scientific terms. One is a function of the other. It is structural. This is the cancer eating at the system.
So far, only one side has been forced to adjust. The South is tightening its belt. The North has not yet accepted any serious responsibility for its role in this currency imbalance, so like the attitude of France and the US towards struggling Germany under the fixed-exchange Gold Standard in 1930.

Didn't I read something by him about Germany bashing?

Anyway, the above seems just about right to me FWIW.

[oddlots]

Re: Surprise! EU leaders produce little of substance at summit

This is also an excellent treatment:

http://www.macrobusiness.com.au/2011...-suicide-pact/

Particularly like the charts at the end. What are these people thinking?

[sunskyfan]

Re: Surprise! EU leaders produce little of substance at summit

From 30,000 feet you have a demographic shake down of people who are retiring of people extracting resources and services from younger people who are not interested in producing those resources and services. Just as in the US I am amazed that people continue to be lost in the financial analysis expecting there to be some magic mapping that fixes all this either in the US or Europe or Japan.

[jk]

Re: Surprise! EU leaders produce little of substance at summit

edward hugh's take. well worth the read.

[c1ue]

Re: Surprise! EU leaders produce little of substance at summit

edward hugh's take. well worth the read.

When he talks economics, Edward Hugh seems sensible.

But when he talks politics, I am much less impressed.

He says:

People say that the EU was created to ensure there were no more wars in Europe but personally I think a West European centred WWIII was never a very likely eventuality. In any event the EU could have been set up with a much more limited objective, namely to end periodic outbreaks of tribalism and jingoisim.

So what exactly do you call the UK opting out of the relevant portions of the EU/euro in order to act as an offshore FIRE outpost?

What do you call French desire to print vs. German desire to not print?

Why is there no mention of the world nationalism?

It is far different than tribalism, and having a European Union with common currency, border restrictions relaxed, etc is an excellent way to remove perceived differences between 'us' and 'them'.

Then there's this statement:

What Wolfgang is getting at here is that the core of the proposed EU agreement is the introduction of the so called "balanced budget amendment" as a binding principle across all the eventual signitaries.

Have debt levels in recent memory ever gone down? Isn't the power to limit debt very much in alignment with loss of fiscal sovereignty, i.e. fiscal unity?

As I've noted all along: Germany won't cough up its credit rating and allow euro money printing until it gets fiscal control. Either the rest of the EU - especially France - surrenders this or they'll have to boot Germany to get what the money printing they want.

I originally though Germany might not want to get into this type of knock-down, drag out furball, but clearly I was wrong.

Fiscal Unity or Germany booted out of the EU.

[unlucky]

Re: Surprise! EU leaders produce little of substance at summit

As I've noted all along: Germany won't cough up its credit rating and allow euro money printing until it gets fiscal control. Either the rest of the EU - especially France - surrenders this or they'll have to boot Germany to get what the money printing they want.

I originally though Germany might not want to get into this type of knock-down, drag out furball, but clearly I was wrong.

Fiscal Unity or Germany booted out of the EU.

Merkel's government has certainly played a hair-raising game of brinksmanship, and it ain't over yet.

But.. would they really be prepared to let the eurozone go over a cliff? After all, the CDU did vote recently to allow money-printing "as a last resort". (Of course since the ECB is independent it is not actually their call).

It's all part of the play - keep 'em guessing.

[c1ue]

Re: Surprise! EU leaders produce little of substance at summit

Merkel's government has certainly played a hair-raising game of brinksmanship, and it ain't over yet.

But.. would they really be prepared to let the eurozone go over a cliff? After all, the CDU did vote recently to allow money-printing "as a last resort". (Of course since the ECB is independent it is not actually their call).

It's all part of the play - keep 'em guessing.

I'd say that the balance of the equation isn't just about Germany possibly forcing the dissolution of the EU - or more likely booting Germany out - it is the rest of the EU also not coming into agreement with Germany.

And in response I'll note these factors:

1) Germany was the big dog with the euro. You only have to see the role of the Bundesbank in the ECB.

2) Merkel, whatever her actual views are, must achieve a material form of fiscal control over those nations partaking of money printing at the expense of German savings. She is far too astute a politician to not understand that a failure to do so will doom her party for the next 2 decades as well as her own political prominence, as every single opposing political party in Germany will beat that to death (and beyond).

3) The EU bureaucracy, when all is said and done, also want a stronger union.

4) In terms of operations, booting Germany is actually the easiest for the rest of the EU/euro region. They can keep their existing euros while printing like mad, and the departure of Germany will hasten the devaluation of the euro which would occur anyway - but now it can be blamed on "Zee Germans"

[astonas]

Re: Surprise! EU leaders produce little of substance at summit

I agree with almost everything you're saying in this thread, c1ue. I'm not entirely sure about this one, though.

4) In terms of operations, booting Germany is actually the easiest for the rest of the EU/euro region. They can keep their existing euros while printing like mad, and the departure of Germany will hasten the devaluation of the euro which would occur anyway - but now it can be blamed on "Zee Germans"

Let's set aside for a moment the issue that no legal mechanism to eject a country directly exists.

Even then I think it's helpful to remember that while Germany is indeed playing the heavy in this game, they aren't the only ones who hold this viewpoint, just the only one muscular enough to represent it forcefully. This is one point that the press seems to lose sight of a lot.

Yes, Germany, France, Italy and Great Britain are the big powers involved. But Britain could never have been forced out if only Germany, France, and Italy wanted to make it happen. Even if the votes are there, the optics aren't. In this case, the optics are the difference between a picture of Britain being stubborn and saying "no", and a picture in which Germany, France and Italy gang up, and beat Britain up for its lunch money. One is a truculent and uncooperative loner, the other is blatant economic warfare. (Blatant being the catch, not the warfare part.)

The trick used to force Britain out required near-unanimity of support, at the very least within the EMU17, for terms that were obviously unacceptable to Britain.

Let's assume that France and Italy and Britain wanted to get the job done, and boot out Germany. And even assume that they had the rest of the PIIGS and Belgium behind it. This is a regional dynamic. If it looked like Germany were to be forced out indirectly, those nations now content to let Germany take the heat wouldn't be so quiet.

The Netherlands, Finland, Denmark, Austria, Poland, Sweden, Slovenia, Slovakia, Hungary, Romania, Bulgaria, the Czech Republic, and the three now-lean nations in the Baltics ALL have lower debt/GDP ratios than Germany, as well as greater geographic and cultural alignment. And while only the first few have been vocally sympathetic, it is hard to imagine the other ones not quietly agreeing as well. They know that if Germany goes, it is just their own savings on the line instead of Germany's.

So to my eyes, it's not about kicking Germany out. It's about whether to keep the Eurozone a two-culture union, or make two, one-culture unions. And I suspect that for all the public posturing for their own electorates, the people a the top know they actually do need each other. The Germanics need the "profligate" to keep their currency low. The PIIGS need Germany and co. to prevent a visitation from an Argentina-style default path.

I do think you're dead on about having someone to blame, though. Everyone knows they need to take the bitter medicine. Everyone needs someone to point the finger of blame to. So it's a game of "You put on the devil costume for my press conference, I'll put it on for yours." Everyone gets re-elected (or at least not skewered) at home. And who knows, maybe someday some medicine will be consumed.

My supposition until now was that Britain was being made to be the whipping boy for both the North and the South of continental Europe. We'll see what people are saying in a week or two, when the news isn't just about what happened on Friday. But even if blame stays on the continent, that doesn't mean a breakup is near. Just that posturing is needed to feed the voters.

And when has that NOT been true?