EU: Fiscal and Banking Integration – Cyprus Bailout

The Finance Chiefs of Germany, France, Italy and Spain have taken to the stage to discuss new plans for short-term and long-term management of fiscal and banking integration, coming after Cyprus becomes the fifth member of the common currency to request a bailout.

Cyprus Joins Spain, Italy, Ireland, Portugal and Greece under EU Umbrella

The finance ministers are meeting today to discuss closer union as laid out by a proposal from European Council President Herman Van Rompuy.  The document proposed greater fiscal union, which could lead to common debt being issued by the Eurozone countries.  There would also be banking union, with a single European banking regulator and a unified deposit guarantee scheme.  Among other proposals were limits on the amount of debt individual countries can take on, annual national budgets can be vetoed if they are likely to mean a county exceeding its debt limits, the possibility of the Eurozone borrowing money collectively could be looked into, a European treasury office to be set up to control a central budget and keep an eye on national ones, common policies on employment regulations and levels of taxation, joint decision-making with national parliaments to give it democratic legitimacy.  Though this seems to provide a groundwork for the progression of the Euro, many of the proposals are merely revisiting previous agreed upon regulations in the Stability and Growth Pact. These regulations failed in the past because of a coordinated supranational entity and a lack of enforcement.  The failure of the SGP came because Germany and France, the countries responsible for the EU and the creation of the pact, violated its restrictions on debt.  The Court of Justice (European Court of Justice) is an example of a supranational entity created to observe and ensure that EU laws, treaties and institutions are adhered to.  Through the infringement procedure, the ECJ is able to place a fixed or periodic financial penalty.  Nevertheless, this institution was not given the proper amount of authority into national areas of its members, thus making it unable to observe the political and fiscal matters of those countries that are now on the brink of default.  So saying, the current list of proposals are nothing entirely new but debates circulating about a joint finance ministry may provide the supranational entity needed to enforce and regulate the further integration needed for the progression of the EU.  In regards to steps towards effective integration, the European treasury would now be able to force Eurozone countries to make changes to their budgets to keep their deficit down, which previously was never enforced and merely left to the individual member states.

“Under these rules, the issuance of government debt beyond the level agreed upon in common would have to be justified and receive prior approval.  Subsequently, the Euro area level would be in a position to require changes to budgetary envelopes if they are in violation of fiscal rules, keeping in mind the need to ensure social fairness.” – Herman Van Rompuy, European Council President

One of the catching points for forward movement by the EU is the divide surrounding join borrowing, something that has kept Germany and France from being the dynamic partnership that so many previously assumed them to be.  It has generally been true that the EU’s movement has been driven forward when France and Germany are in step.  However, they are not in unison anymore.  There is a deep philosophical political divide between them, most evidently exemplified by the dissolution of ‘Mercozy” through the election of the socialist Hollande in France.  The divide of the EU on joint borrowing  is embodied by the concept of Eurobonds, which would be a way to allow countries that are currently unable to borrow money commercially to borrow at low-interest rates.  Some countries, largest of whom is Germany,have resisted this step unless there is much closer fiscal union.  The reason for that is that Eurobonds would have much the same effect as the original introduction of the Euro, which is that they would allow many government access to cheaper loans and therefore, without European supranational control over budgets, some countries would again take on unsustainable levels of debt.  So saying, the Eurozone’s third smallest economy, Cyprus, has become another member to apply for rescue loans.  The country is said to possibly need up to 10 billion Euros, more than half its 17.3 billion annual output.  This comes after Spain formally requested up to 100 billion Euros in rescue loans to recapitalize its banks weighed down by bad loans from a burst real estate bubble.  Both Spain and Cyprus are trying to avoid political humiliation and loss of sovereignty involved in a full state bailout program like those granted to Greece, Ireland and Portugal.  The approaching Brussels summit is expected to agree on a growth package pushed by France, worth around 130 billion Euros in infrastructure bonds, reallocated regional aid funds and European Investment Bank loans.  Spain, along with Italy, is likely to press at the summit for more urgent actions to lower borrowing costs and have proposed measures to reduce the difference in borrowing costs between Eurozone countries.

“The euro crisis is in some war mind-boggingly simple to solve…because it isn’t economics, it’s politics.  If Angela Merkel and her colleagues stood there together with the rest of the Euro area…and if they behaved as a true union, this crisis would be finished this weekend.” – Jim O’Neill, Chairman of Goldman Sachs Asset Management

Germany however, is remaining rigid on its stance that it should not finance  a country that indulged in excessive spending.  Because of her rigid stance, Merkel has been target of much criticism and some have suggest that Germany be the country that exists the Eurozone.  The support given is that Germany embodies the problem of the EU, the inability to balance polar opposites on the economic scale.  The periphery countries of the EU are the ones in debt and the ones facing default.  Not only is Germany’s economy inherently strong as a result of the high productivity of its workforce, its exports have added competitiveness because the Euro is undervalued as far as Germany is concerned.  As long as the rest of the Eurozone countries are locked in the Euro with Germany, the only way for them to become more competitive is through austerity measures that cut government spending, reduce welfare budgets, cut wages and raise unemployment.  These are the steps that have been taken for the past 2 years of the fiscal crisis and the aim has been to achieve export-led growth, like Germany.  As long as Germany remains in the Eurozone however, its hypercompetitive stance will make redundant the measures being taken , as the periphery countries will not be able to compete against the power house.  Nevertheless, the support for Germany’s exit may seem well based but its fails to address the fact that Germany is the only country keeping the Euro afloat, funding all bailout measures and without Germany and its seemingly endless pocketbook, the rest of the Eurozone would fall calamitously into a series of defaults and downgrades for years to come.  This would ruin the regional fiscal infrastructure, ruin the global markets, and dissolve international trade with many of the nations dependent on foreign investment.  In short, if Germany were to exit the Eurozone the other nations would be detrimentally affected, regardless the possibility to revert to Eurobonds.

EU: What the Future Holds for Europe – Greek Elections

Greek voters are returning to the polls on Sunday, leaving hanging in the balance the future of the country’s membership in the Euro and heightening general uncertainty about the future of the EU as a whole.

The EU Has Reached A Tipping Point

In 1952, German Chancellor Konrad Adenauer and French Prime Minister Robert Schuman introduced the beginnings of European integration, uniting the coal and steel industries of France, West Germany and the Benelux countries.  Over the next 50 years, the integration process would come to include a club of 27 states, becoming the European Union, which now stands at a possible breaking point.  Since its creation, the European Union has both expanded in number and deepened in purpose.  Initially a common market with subsidies to farmers, the EU has evolved into a community with coordinated foreign aid and trade policies, open borders among members, a common social policy and a powerful European Court.  Nevertheless, the problems of monetary union began in 1992 with the Maastricht Treaty which began the process of monetary union and was intended to begin economic convergence among member states.  The second part, economic convergence, was and is today the hurdle facing the members states of the EU.  The Stability and Growth Pact, introduced by France and Germany, was meant to harmonize interest rates, inflation and government deficits; yet, there were no enforcement measures and the sponsors of the pact, France and Germany, were the first among the states to breach the regulations on deficit as they both exceeded deficits of 3% of GDP.  So saying, how Europe handles the unbalanced economies of its members and its headlong expansion will decide whether the Eurozone recovers from its contagion or slowly disintegrates.

“Today we open the path towards a better tomorrow, with our people united, dignified and proud.  To a Greece where there’s social justice and progress – an equal member of a Europe that’s changing.  Today the people of Greece spake.  Tomorrow a new era begins for Greece.” – Alexis Tsipras, leader of the Syriza party

The first challenges to overcome is the Greek’s second attempt at a decisive electoral process, coming after an indecisive round in May resulting in the rise of polar opposites in the party system.   If a working majority emerges under the leadership of the New Democracy Party, Greece has a likely chance of following through its austerity measures, despite animosity and criticism therein involved.  These measures would perpetuate Greek membership in the EU, appease its troika (European Commission, International Monetary Fund and European Central Bank).  Even if this pro-bailout government is formed, the political paralysis of Greece has already put it behind on its obligations to privatize state industries and improve tax receipts.    If this weekend’s election extends the paralysis begun by May’s vote, the uncertainty whether Greece can remain in the Eurozone will intensify, resulting in another volatile yo-yo of international markets.  Moreover, the uncertainty in Greece would also intensify the pressure on Spain and Italy.  The combined economies of Ireland, Portugal and Greece – three countries that have been bailed out – are smaller than half of Spain, which the Eurozone could not afford to have fail, becoming a ‘too big to bail, too big to fail’ member.  The EU’s willingness to help bailout Spain’s massively indebted baking system has already surpassed the amount of 100 billion euros.  Spain’s financial future is highly questionable as Moody has cut Spanish sovereign debt to just a notch above junk status, on par with Azerbaijan.  Unemployment has also reach record highs, with youth under 25 years of age at 50% unemployment, and house prices are also collapsing.   Nevertheless, another possibility in the Greek elections is that the left-wing Syriza party emerges with a majority, and with its commitment to depart from current bailout agreements like the austerity measures, Greece could very well anticipate a ‘disorderly exit’ from the Eurozone.

“This is the financial equivalent of the Cuban Missile crisis.  And the missile is really a bank run, which ultimately even the Germans can’t be completely immune to.  Not that there will ever be a run on Germany banks, but the effects of a bank run across Southern Europe are going to be felt by the economy.” – Niall Ferguson, Harvard historian

So saying, the future of Europe is at a crossroads, with only a few future scenarios on the horizon.  The first and worst scenario is a disorderly collapse of the Eurozone, starting in Greece but spreading to Spain and Italy.  This scenario would be likely with anything less than a clear victory, the Greek state could fail to meet its troika obligations and would not receive any further bailouts, essentially imploding upon itself.  According to the Greek economic minister, Greece only has enough money to run effectively until July 15.  If this case were to emerge, Germany has stated that it would put fiscal rectitude ahead of its pan-European principles.  Without Germany’s bankroll to help support many of the peripheral member states, the scenario could result in the Eurozone being reduced to a Franco-German core, with the Benelux states attached.  For the rest of Europe and its economy, the consequences would be calamitous; with governments defaulting on debt, a prolonged recession would be a certainty all across the European continent.  The second course is that Europe stumbles through whilst still attempting to achieve banking and fiscal integration.  Given that 80% of Greeks want to stay in the Eurozone, a Greece-troika compromise is not so unlikely and would also bring the country back from the edge of default.  A full recovery would be years away but the country would no longer be the spark to ignite the powder keg of defaults as seen in the first scenario.   The new European Stability Mechanism, due to come into effect next month as a permanent rescue fund, would help recapitalize banks and help cool yields on vulnerable sovereign debt.  With 500 billion euros at its disposal, the ESM would help the EU progress towards Chancellor Merkel’s growth agenda.  Germany aims to move towards a banking union that would insure deposits, progress toward common tax policies, the decline of government debt and the emergency of the Eurozone from its recession, all of which would help ease the pressure on governments struggling to find a common ground.  Though an imposing task, the struggled of the agenda are in Germany’s best interest because 60% of their exports stay inside Europe and without those trading partners, the German economy would be severely impacted.  The final future scenario for the EU is a move towards much closer integration, the fulfillment of the economic convergence promised in 1992.  The new French President Hollande has made this his montra, seeking to stimulate growth and imagination and creativity to deepen financial union, such as a joint fun to pay down debt.  Though it would seem to be a more secure and ideal scenario, the prospect will not gain support from a European public no longer convinced of the benefits of a deeper integration, nor of a German state unwilling to allow more countries to sign onto their bankroll.

“Germany’s strength is not unlimited.  The way out of the crisis can only be successful if all countries are capable of recognising the reality and realistically accessing their strengths.” – Angela Merkel, German Chancellor

In retrospect, the EU was intended to create a fiscal union of members that would be able to avoid repeating mistakes made in the 1930s, yet it seems that the cliff facing them now is illustrating that they have not been able to avoid those mistakes.  Unless the EU community is able to recognize the choices that have been and those that must be made now for the security of the union, and not of individual members,  the EU will most likely cease to exist or be severely reduced in membership and fiscal integrity.  They must enter a much larger form of integration, both political and economic, committing to a more federal system.

Iran: Nuclear Talks and the Russo-American Dilemma

The tense relations between Russia and the US, between President Barack Obama and Russian President Vladimir Putin, brings rise to concerns over ongoing Iran nuclear talks, set to resume in Baghdad on May 23.

Iranian Nuclear Talks will Require Closer Russo-American Ties

Russian President Vladimir Putin has unveiled a government dominated by loyalists, leaving hopes for reform slim and entrenching Kremlin’s over the economy’s commanding heights.  Along with Putin’s opting out of the G8 Summit, the tense relations between Russia and the US are worrisome for many due to the importance of a strong front being presented by Putin and Obama against nuclear proliferation in Iran.  With President Obama facing his reelection year, talks between the two nation’s will be scarce and wide-spaced, leaving little room for political gobbledygook, stressing substantial progress on relations that have already been strained by the Syrian civil war.  With Russia and America as the two former superpowers responsible for decades of nuclear standoff, they have also assumed the roles concerning nuclear development and proliferation.  America’s pursuit of hegemony has resulted in a staunch policy condemning countries seeking nuclear programs, demanding countries to disarm despite America’s own unwillingness to denuclearize.  So saying, President Obama’s position on an Iranian nuclear program is clear.  Obama has repudiated any intention of adopting deterrence of a nuclear Iran as an acceptable policy option.  Thus, such rigidity could result in an Iranian agreement to live up any resolve to acquire nuclear weapons; President Obama could retreat from his previously assumed rigidity; or there could be war.

“Iran is not after nuclear weapons because the Islamic Republic, logically, religiously and theoretically, considers the possession of nuclear weapons a grave sin and believes the proliferation of such weapons is senseless, destructive and dangerous.” – Ali Khamenei, Iran’s supreme leader

War seems to be a drastic conclusion to draw, as all state leaders are assumed to be rational independent thinkers, yet Iran’s history does not suggest appeasement to be high on the agenda.  Nevertheless, Iran has shown signs of a renewed unwillingness to take seriously these talks between itself and the P5+1 (Britain, China, France, Russia, America and Germany).  Iran’s supreme leader Ali Khamenei has stated that the pursuit of nuclear weapons is considered a grace sin and believes the proliferation of such weapons is senseless, destructive and dangerous.  The supreme leader has also stated his ultimate goal is to make the state of Israel disappear, as well as to the combat the ‘Great Devil’ represented by the American nation.  The transitions from repressive isolation to willing nuclear talks stems largely from international sanctions imposed on the country in recent years, slowly constricting the economy over the past year.  With both the EU and the USA embargoing Iranian oil shipments, Iran’s oil sits in storage tanks.  Iran’s oil sector accounted for 60% of total government revenue, thus the vulnerability of the regime’s strength to said sanctions is apparent.  A dollar decline in the price of crude oil could reduce the government revenue by as much as $1 billion.  So saying, Iran’s intentions may be to purely seem wiling and cooperative so as to relieve itself from such crippling fiscal constraints.  So saying, most of the countries within the P5+1 remain highly skeptical of Iran’s true intentions and purposes.  Many believe that Iran is using the talks as a stalling tactics so as to buy time to produce the kind of highly enriched uranium necessary for bombs.  The tension of such a situation is very evident considering the danger this would present to America’s prime Middle Eastern ally, Israel, who has already stated its intention to use military force to ensure its security.

“I don’t think there is any question that the impact of this pressure played a role in Iran’s decision to come to the table.  The value of their currency, the rial, has dropped like a rock.” – David Cohen, Undersecretary of Treasury

Iran will seek bargaining leverage in the talks, seeking to drive a wedge between an already strenuous connected group of state leaders.  Iran will see to generate further tensions among its negotiating adversaries while maintaining a tight diplomatic unity of its own.  For this reason, the Russo-American relations must grow into a more coherent P5+1 force with which to deal with the Iranian situation.  With Sarkozy out, Francois Hollande is likely to be more accommodating then the hard-line Sarkozy.  Germany and Britain will rally around US but will do little in ways to provide leadership because of the hegemony represented by Russia and US in this area.  China has become more isolated in recent years, more fixated on its economic interests and need for oil, hence the growing tensions over the Spratly islands. So saying, Russia is the last significant player in the equation. Russia has grown skeptical of American diplomacy but many theorists suggest that it has grown concerned about a possible nuclear-armed Iran, thus more wiling to act accordingly.  With US and Russian relations frayed in the past because of American dominance and unstated aims in Libya, later exasperated by the Syrian civil war, the diplomatic ties between Russia and America will be easily torn asunder by Iranian leaders if not properly dealt with.

EU: Troubles with the Political Currency – Troubled from Creation

As Greece leaders meet to avert new elections, fears have been reinforced that the country is firmly on the path to bankruptcy and an exit from the Euro, a political currency that may see its own end soon.

The Euro Faces “Make it” or “Break it” Point.

The radical left-wing coalition leader, Alexis Tsipras, has declined an invitation by the Greek president to try to form an emergency government.  Italy faces greater debt and contraction under strict austerity constraints under Euro regulations.  Ireland faces a May 21 referendum asking the public to approve an EU treaty that aims to control nations’ annual deficits and longer-term debts, but the treaty ignores the competing need to stimulate growth and is now facing an increasingly euroskeptical populace.  Combined with Hollande’s far-left victory as France’s president and the ultra-left rise in Greece’s parliamentary elections, the events could force the European supranational entity to shift in favor of less austerity measures and greater investment in growth.  Even if the fiscal treaty is ratified by the minimum 12 nations required, it is likely to be an economic dead letter before it comes into force next year.  Its key goal is to bring deficit limits under the threat of ECB fines.  Once again, the main proponent is Chancellor Merkel and her CDU party.  Nevertheless, Merkel’s previously sound support structure seems to be cracking as the CDU party faced a heavy state election defeat in Germany’s most populous region.  With Britain disconnected from the EU and the major founders of the currency in turmoil, the future of the political currency seems rather bleak.  The EU powers that be, predominantly in Germany, remain in public denial about the real underlying reasons for the Eurozone crisis: the fault design of the Euro common currency, with no central coordination of debt funding.  The only solutions will require Chancellor Merkel and her uneasy electorate to accept the need for national debts to become European property, further imposition of supranational regulations into the independent banks and sovereign governments.

“We have to stay in the Euro.  I’ve lived the poverty of the Drachma and don’t want to go back.  Never! God help us.  They must cooperate or we’ll be destroyed, it will be chaos.  For once, they must care about us and not their chair.” – Maria Kampitsi, 70-year old Greek pensioner

In the 1990s, the continent’s political leaders believed that the division of a continent that so often torn by war were of the past, and that a single currency would bind the continent into a union.  Today, with Greek on the brink of bankruptcy – and Ireland, Italy and France deep in debt – Europe’s fiscal experiment faces extinction.  The problems of the past have come surging back, but even though talk about what’s wrong with the Euro focuses on complex matters such as national debt ratios, labor market reforms and pension protections, one fundamental problem is, comically, blaming Adolf Hitler.  After the fall of the Berlin Wall, a newly unified Germany was bent on leaving behind its recent division and the dark days of two World Wars.  Germany had to make sure the rest of Europe was aware of its peaceful intentions, thus it seemed agreeable to bind its own success with those of its neighbors.  Germany and France, the drivers of the Euro projects, pushed to be as inclusive as possible despite the evident risks.  Now, Germany recent leadership in strict fiscal measures and regulations has revived thoughts of Germany’s intentions of domination.  Nevertheless, the regulations initially installed by the supranational body were as strict, if not stricter, than what is being demanded now. The rules then, were strict and clear but were not adhered to.  The requirement was that no Nation must carry debt greater than 60% of their gross domestic product.  Now, Greece’s deb ratio is 165%, Italy’s is 120% and Ireland’s is 107%.  Even the powerhouses of France and Germany are above 80%.

“The first cut has released all the old demons.  We’re back to calling the Greeks lacy, the Italians shady, the British disconnected, and the German bent on domination.  It didn’t take long, did it?” – Richard Whitman, University of Kent in England

Coincidentally, the general entrance of Greece into the EU was based on falsified reports that spoke of its adherence to the fiscal requirements, meanwhile Greece’s economic situation then was already violating the GDP ratio.  It was also widely known that the Greek government had a reputation for not collecting taxes – $65 billion in back taxes are outstanding – and overall, Europeans regarded its economy as a mess.  Nonetheless, Greece was the birthplace of democracy, home to the Acropolis, the cradle of European civilization.  Greece’s entrance was sentimental and symbolic at best.  Greece is and was an extreme example of the problems facing the EU, but in general, the problem lies rooted in the fact that while sharing a single currency, individual nations would continue to handle their own tax and pension programs.  Thus, local issues superseded those of the Euro zone needs.  Like the decision concerning Greece’s entrance, many were largely political.  In 1998, Dutch officials warned Germany of the consequences of Italy’s entrance without further fiscal measures for regulation.  The officials were not willing to have Italy enter the union  To the Germans, no Rome equated to no Paris, which was not possible.  Another problem of the single currency is the polarity represented by the different economies.  The European Central Bank was established to regulate the common currency, to ensure that the currency could serve a booming Germany economy and a tanking Greek one.  It has to keep interest rates low to spur borrowing and growth in the south, while keeping rates high enough to avoid inflation in the north.

“The French even under Sarkozy had great reservations about Merkel’s focus on austerity, but they went along with it in hope they could extract  concessions in return.  With Sarkozy gone, Germany will be increasingly isolated.  Germany will eventually weaken its positions” – Simon Tilford, chief economist at the Centre for European Reform in London

In retrospect, the EU is facing a critical challenge to its solidity that is not only represented by the fiscal crisis, but also a growing Euroskeptic populace and a continent-wide political shift towards the ultra-left.  The flexible and ambiguous political decisions  of the past that transformed the European community into a fiscal union must be done away with, and the nations most congregate to form a more perfect union that is monitored on every aspect by some supranational entity.  A total solution would involve a single fiscal policy but that would only constitute one part.  A total solution would have to address the inequities between national economies.

France: Sarkozy’s Bid for Re-Election

As French voters vote to elect a new President, current President Nicolas Sarkozy seeks to beguile far-right voters to combat the surge of support for Socialist challenger Francois Hollande, else Sarkozy faces becoming the first French president to lose a bid for re-election in more than 30 years.

French President Sarkozy Faces Hollande in Second Round

Francois Hollande came out on top with 28.6% and Sarkozy with 27.1% of the vote, the first time a sitting President has lost in the first round.  Hollande’s performance mirrors advances across the European continent by anti-establishment Euroskeptical populists, gaining momentum as the Euro Zone’s grinding debt crisis deepens anger over government spending cuts and unemployment.  Sarkozy has been a target for much EU animosity because of his close ties to German Chancellor Merkel, many critics going so far as satirically entitling the duo as ‘Merkozy’.  France has played key roles in international hot spots such as Libya and Syria, as well as the perpetuating pan-European debt crisis.  Nevertheless, his efforts internationally have not won him much favor, as the domestic economy has been the prime focus of the elections and France is struggling in the face of  sluggish economic growth and a 10% unemployment rate, all of which sits upon their recent downgrade from their prized AAA rating.  The weak showing has forced Sarkozy to expand his constituent base, targeting the rightists under Le Pen, the leader of the National Front that won 19.3% of the votes, equating to 6.2 million people.  Returning to the campaign trail, Sarkozy propagated promises to toughen border controls, tighten security on the streets and keep industrial jobs in France, signature issues concerning the rightists.  The recent populist rise has already evicted 10 other Euro Zone leaders from office since the start of the crisis in late 2009, evidently lending credibility to the rumors that Sarkozy will soon be ousted.

“National Front voters must be respected.  They voiced their view.  It was a vote of suffering, a crisis vote.  Why insult them?  I have heard Mr. Hollande criticizing them.” – Nicolas Sarkozy, French President

There are now two more weeks before France elected its President on May 6th.  Sarkozy will not doubt continue his aggressive tactics, confronting his rival’s lack of experience at government level, and trying to corner hum during the traditional TV debate.  Sarkozy has already attempted to challenge Hollande to 3 debates, rather than the traditional 1.  Sarkozy seeks to impress upon the people his experience and intellect by focusing on the economy, social policies and international affairs, all the while accusing Hollande of avoiding the debates.  Nevertheless, the strong turnout of 802%, in which more than a third cast ballots for protest candidates, the future seems foreboding for Sarkozy’s typical tactics of showboating and scapegoating.  Hollande has vowed to change the direction of Europe by tempering austerity measures with higher taxes on the rich and more social spending.  Polls have already predicted he will win the run-off with between 53% and 56% of the votes.  A predominant contrast in the two remaining contenders’ economic approaches is that Hollande generally supports more government action to stimulate the economy whereas Sarkozy favors policies such as lowering some taxes and possibly repealing the mandated 35-hours work weeks.  With France’s domestic interests rallied around economic prosperity, a juxtaposition to years of hardship and downgrade under Sarkozy, Hollande seems sure-footed in the road towards the final elections.

“The choice is simple, either continue policies that have failed with a divisive incumbent candidate or raise France up again with a new, unifying President.” – Francois Hollande, Socialist Presidential Candidate

In retrospect, the results of the elections are a bad sign for Sarkozy, who will now be forced to perform a balancing act of campaigning to far-right wing voters and maintain a hold on his centrist supporters.   If Hollande wins, as is very likely, Hollande will be France’s first left-wing president since Francois Mitterand.  The rise of Hollande has come as a response to the economic crisis, providing ground for populism to develop.  Wages, pensions, taxation, and unemployment have been topping the list of French voter’s concerns, concerns founded on the mistakes and consequences of Sarkozy’s measures taken to counteract the debt crisis.

EU: New Year, New Summit, Same Problems

The fate of the European Union continues to hang precariously on the edge as the European Council, constituting the heads of state, prepare their first summit of the year today, 30 January.

EU Leaders Are Set To Meet Monday To Discuss The Fiscal Compact

The official agenda is focused on striking a balance between more austere fiscal measures for nations with unsustainable levels of debt and policies that will help revive the economic growth across the 17-member Euro area.  The summit marks another in the series of attempts by Euro area leaders to reign in the perpetuating crisis that has spread malignantly across the members of the single-currency zone.  The fear of recession has continued to build after Standard and Poor’s credit rating agency downgraded 9 Euro area governments, most notable among the downgrades were Austria and France which lost their top-tier AAA ratings.  S&P’s then continued to hack away at the security and the hopes of reform by downgrading the European Financial Stability Fund (EFSF) to AA+.  The Euro area economy is widely expected to suffer a mild recession this year as governments cut spending to balance their budgets.  In France, Sarkozy has implemented what man have called a “Robin Hood” tax, which has increased sales taxes and levies on financial incomes to fund a 13 billion Euro cut in payroll charges.  The increase would amount to 1.6% points and bring the rate of tax on most goods and services to 21.2%

“There will be a lot more talk about growth and austerity.  That’s helpful in the long run and could help prevent a future crisis, but it doesn’t solve the current one.” – Jennifer McKeown, economist at Capital Economic in London

EU leaders will discuss today the latest draft of the fiscal compact and two final unresolved questions on the draft resolution.  According to the draft, the European Court of Justice (ECJ) will be empowered to impose sanctions in fiscally wayward countries under a new accord that has been supported by the majority of the EU countries.  The ECJ may impose on the country a lump sum or a penalty payment appropriate in the circumstances and shall not exceed 0.1% of its GDP.  The draft also says that if a country wants to borrow from the Euro area’s permanent bailout fund, the European Stability Mechanism (ESM) after March 201, they must first ratify the fiscal compact, which will be activated after ratification by the national parliaments of 12 countries.   The agenda for today’s summit also deals with whether non-Euro countries that have signed the pact will be allowed to participate in meetings where Euro-area issues are discussed, which has been a highly critical issue with the UK and David Cameron.  Another question is whether sanctions will be implemented when countries fail to meet the pact’s requirement on debt-to-GDP ratio.

“The outlook for economic growth in Europe in 2012 is not a healthy one and consensus forecasts for earnings-per-share growth likely do need to be adjusted downwards.” – Ian Scott, chief global strategist at Nomura Holdings Incorporated in London

The draft suggests that there have been tentative signs of economic stabilization in Europe, but financial market tension continues to weigh on the economy.  European stocks headed for the biggest 2-day drop since November amid concerns about the meeting of the region’s leaders.  Sadly, even EU officials have voiced skepticism about the EU initiatives.  BNP Paribas SA tumbled 5.8%, Royal Phillips Electronics NV dropped 2.%, Hochtief AG sank 5.4% and Stoxx Europe 600 Index retreated about 1% to 25.93, which is the largest 2 day slip since November 23rd.  In Brussels, home the EU summit, union strikes in transport and other public services ground the entire country to a halt.  It is the first general strike since 2005 and the first since 1993 launched jointly by the country’s 3 main unions, which are all aggravated by public spending cuts of more than 12 billion Euros for 2012.  Moreover, the summit comes amid ongoing uncertainty over Greece.  Greek officials took exception to a proposal sponsored by Germany, that would effectively give the EU the power to veto Greek pending plans in return for aid.  German Finance Minister Wolfgang Schaeuble warned that Greece must show Europe it is capable of implementing fiscal reforms or Greece may not receive a second bailout totaling 130 billion Euros, which is necessary for the country to avoid a default this spring.

“We seem to limp from one summit to save the Euro, to another.  It is prudent in the face of this uncertainty to take a more defensive stance toward the Euro.  There is pretty decent chance that in the first half of this year, we’ll have a lot of $1.20” – Simon Derrick, chief currency strategist at Bank of New York Mellon Corporation in London

Among the criticism facing the EU, US Treasury Timothy Geithner has escalated pressure on Germany to strengthen firewalls, such as the EFSF/ESM, against future recession.  Both Geithner and David Cameron suggest that a credible effort would be a precursor to increased IMF support for the region.  Nevertheless, Merkel has resisted calls for boosting the size of the region’s rescue funds, insisting that a long-term commitment to fiscal discipline and a patient approach toward improving competitiveness and restoring confidence are crucial to solving the crisis.  So saying, Germany has served as the supporting structure for the ailing Euro for years now and still stands on a top-tier AAA rating, as well as a long history of fiscal recession and re-cooperation, suggesting that its approach has been tested and been successful.  Though the summit may not yield any major breakthroughs on the discussion for the rescue funds, many leaders may find themselves shielded as a result of last month’s large injection of liquidity into the European baking summit by the European Central Bank (ECB).  Banks took up nearly half a trillion Euros in 3-year loans in the long-term refinancing operation, a move that has helped face bank funding worries.

EU: The “Stability Union” – Brussels Summit

The outcome of the two-date European Union Summit has sparked hope but skepticism as the Eurozone block united towards further fiscal integration under a new separate treaty.

The Pressure Is On For European Leaders To Get It Right This Time

The outcome of the Summit has left financial markets uncertain whether or when more decisive action will be taken to stem the prolonged debt crises in Greece, Portugal, Ireland, Italy and Spain; but progress has yielded modest gains on global markets and has presented a grand opportunity for the European Union to emphasize the strength of supranationalism.  After 10 hours of talk, that carried on Friday morning, all 17 Eurozone members and 9 other aspiring members have resolved negotiations on a new treaty along with the reforms to the EU treaty (Lisbon Treaty).  The agreement reached calls for tougher deficit and debt regime to avoid a repetition of the debt crisis in the future.   So saying, a new treaty could take 3 months to negotiate and requires referendums in some countries, such as Ireland.  In the meantime, the European Central Bank (ECB) will be vital in the coming days with markets doubting the strength of Europe’s financial measures to protect vulnerable economies such as Italy and Spain.  The ECB has agreed to keep purchase of Eurozone government bonds capped for now and not take extra precautionary measures.  The purchasing of bonds by the ECB were a highly debated and controversial issue, most vocal opposition came from the Germans which viewed the actions as demeaning considering the calls for budget control, reform and austerity measures.  The purchasing of bonds represented a temporary relieve for many nations, allowing them to grow law in a time of urgency and severity, further perpetuating the fiscal crisis in Europe.  The ECB cap decided by the bank’s governing council has limited bong purchases to around 20 billion Euros a week.  Evidently, with Standard and Poor’s move to issues warnings throughout the Eurozone of potential downgrade, as well as taking preemptive moves to downgrade multiple French banks, the threat of market and public volatility is very real and the EU must make steady progress to catalyze on the time allotted to them.

“This is a breakthrough to a union of stability.  The fiscal union will be developed step by step.  We will use the crisis as a chance for a new beginning.  We achieved an important step towards long-term stable Euro.  You can say it’s the breakthrough to the union of stability.  The stability union, the fiscal union will be developed step-by-step in the next years, but the breakthrough has been achieved.” – Angela Merkel, German Chancellor

The new treaty for the Eurozone and aspiring members is supposed to create a fiscal union or a merging of the budgetary policies of the 23 countries involved in the EU.  Among the key elements are debt brakes, which set a maximum budget deficit of .5% of the countries’ gross domestic product and should be enshrined into the countries basic legal framework.  Beginning in 2016 and once this policy is in fully effect, Germany’s deficit limit will be at .35%.  Another element are budget checks, in which members would be expected to present their national budget proposal to the European Commission before final approval by their individual legislatures.  In a step towards escalation of supranational power, the Commissions’ sanction powers under the infringement procedure have been magnified.  If the Commission identifies violations of the fiscal union’s rules or if a country’s deficit is too high, then the Commission can automatically initiate pre-determined sanctions.  This can only be stopped by 2/3rd agreement of the finance ministers.  Lastly, the new agreement has loudly rejected the concept of members pooling their debt under Eurobonds.

“The 17 member states of the Eurozone and already many others are committed to a new fiscal compact, a new European fiscal rule to be transposed in national legislation.  It is more about fiscal discipline, more automatic sanctions, stricter surveillance.  An intergovernment treaty will make this agreement binding in combination with secondary legislation and firm political commitment this will give the fiscal compact its full force.” – Herman Van Rompuy, European Council President

In addition, with the treaty preparation on the horizon, the pressure from international investors, credit rating agencies and Eurozone members is still paramount.  With a large number of EU countries at risk of joining the ranks of the highly indebted, the new agreement has included some emergency measures for short-term predicament. One such agreement is an International Monetary Fund (IMF) emergency fund.  Within the next 10 days, the Eurozone members are to resolve negotiations on the transfer of 200 billion Euros to the IMF.  The money is meant to serve as loans to bankrupt government, such has been the case in Greece repeatedly.  The money is only to be given under strict conditions.  Another element from the Merkozy reforms is the acceleration of the implementation of the European Stability Mechanism (ESM), to replace the current European Financial Stability Facility (EFSF).  The 500 billion Euro EFSF will have to be funded with money from national banks sooner than expected as the ESM has been agreed to become established in the summer of 2012.  for now, the EFSF will not have a banking license; therefore, it will be unable to borrow from the ECB.  Which countries can get loans from the facility will be decided by a majority vote of 85%, a reform pushed for by President Sarkozy but Germany is the country with veto power.  Lastly, with private investors holding the reigns of market outlook for the EU, recent “hair-cuts” on their investment in Greece have not vindicated the strength the EU has tried to demonstrate.  Therefore, the idea of involving private creditors in national debt restructuring or debt cuts has been abandoned.  This serves as a clear signal to the financial markets that government debt can now be purchased without any extra risks.

“So this, we should not forget, what is our aim  The aim is to reinforce discipline, reinforce convergence and to reinforce governance of the Euro area, not necessarily for all 27, but for the Euro area.” – Jose Manuel Barroso, European Commission President

In retrospect, the summit has yielded substantial progress for the future of the EU, as well as hope for the true unionization of the supranational entity.  Nevertheless, much of the agreement rests on full cooperation, successful implementation and in the end, the regulations and guidelines must be upheld by a supervising force, which in this case is the European Court of Justices.  Many of the ideas have been implemented in the past but without successful regulation or supervision, the guidelines grew flexible and forgotten, allowing the high levels of deficit in countries like Greece.  So saying, the EU cannot lose itself in the hype of reforms and immediate progress but must maintain careful perseverance and cautious supervision over any an all members.  Therefore, with countries like Hungary, Czech Republic and Sweden still on the edge about committing to the reforms, waiting for further deliberation with their national governments, the EU must maintain vigilance.