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: Britain’s Negligence and Euroskepticism

Prime Minister David Cameron has effectively isolated Britain from the European community after vetoing an EU-wide treaty change aimed at reigning in the Eurozone crisis and further integrate the EU member nations.

"I regret just how badly David Cameron's negotiation strategy has let Britain down" - Douglas Alexander

Leaders of 26 European countries, including the 17 Eurozone nations, agreed Friday to forge a new pact with strict caps on government spending and borrowing to restructure the foundations of the single currency; but the ever pestering problem of Euroskeptic Britain has illustrated its negligence by rejecting the pact.  26 of the 27 EU leaders agreed to pursue tighter integration with stricter budget discipline in the single currency area, but Britain under Prime Minster David Cameron has stated that it could not accept the proposed EU treaty amendment after failing to secure its desired concessions.  Britain’s veto is enough to thwart German and French plans to reform existing European Union treaties, a process requiring unanimity.  Though Sweden, Hungary and Czech Republic have still to review the pact and consult their national parliaments, the block of 26 will force ahead and create a new separate accord, all of which is explained here.   Evidently, Britain’s refusal to go along with its close allies, Germany and France, has driven a wedge between the two sides and could result in instability between the UK being outside of the union, as well as being the third largest economy in the community,  and the progressive moving 26 member nations that are within the pact.

“The summit will surely resolve the Euro-crisis.  There is no EU crisis apart from Britain being foolish and not looking towards the future.  The Euro can easily live without Britain, but can Britain live without the Eurozone?” – William Middendorf, German citizen in Berlin

The Merkozy duo had wanted a binding compact with all 27 member nations to agree to changes in the Lisbon treaty so that stricter budget and debt rules for the Eurozone could be enshrined in the bloc’s basic law.  Nonetheless, Britain, which is outside of the Eurozone but has persistently seemed fit to criticize and lecture the single currency, refused to support the pact.  Rather, David Cameron said that Britain wanted guarantees in a protocol protecting its financial services industry in London from future financial regulations.  Not surprising that the British Budgetary Question, under Prime Minister Thatcher, was only resolved once EU leaders agreed to compensate Britain for its contributions to the Common Agricultural Policy.  Sadly, David Cameron fails to realize that the current crisis has stemmed from a lack of regulation of financial services and therefore, the UK cannot be handed a waiver.  Most vocal in his anti-Brit sentiment has been French President Sarkozy, who often states that the European community has grown tired of Britain’s independent streak, suggesting the PM was trying to use emergency negotiations as a window of opportunity to defend its own national interest by making demands that were off-point.

“You can’t on the one hand ask not to be in the Euro and at the same time wish to be part of all the decisions affecting a currency you don’t want, and often criticize.” – Nicolas Sarkozy, French President

Coincidentally, such animosity is not uncommon for the two neighboring countries.  Before the creation of the EU, Charles De Gaulle spearheaded the formation of the European Community and protected the French profit gained from the Common Agricultural Policy.  So saying, British ascension into the community would threaten France’s power and also represent ties to NATO and the US, both of which De Gaulle were vehemently opposed too.  Moreover, Britain was against the revenues that all member nations had to contribute to the CAP, as most profit went to France at the time, so Britain’s opposition only fueled French animosity.  Generally, the British membership in the EU has often been questioned due to its history of skepticism and reluctance.  Britain’s opt-out in the European Monetary Union (EMU) illustrates its past and present relations with Euroskepticism which has been evident since the days of Margaret Thatcher the Bloody British Question.  Under John Major, Thatcher’s successor, the UK exited from the European Exchange Rate Mechanism (ERM) which sought to reduce exchange rate variability and achieve monetary stability.  Under Gordon Brown, Britain vehemently opposed the Commission’s proposal to cut Britain’s rebate from CAP and redistribute the proceeds to other net paymasters, as well as increase the EU’s budget by 35% between 2007 and 2013.

“It’s quite untenable for us to remain in a union alone, on the outside, having laws made for us, while we’re in a permanent voting minority.   This is the worst of all worlds for the UK.” – Nigel Farage, leader of the UK Independent Party

Furthermore, the actions by the British Prime Minister has also made evident the divide in his government, as well as the growing instability that his regime may soon be facing.  In the past, Cameron has faced two attempts to hold a referendum on Britain’s membership in the EU, which it joined in 1973.  This recent rift will increase pressure from Euroskeptics within Cameron’s Conservative party.  A recent poll showed that 49% of Britons would vote to leave the European Union while 405 would vote to stay in it.  In contrast, Deputy Prime Minister Nick Clegg, representing the much more pro-European Liberal Democrats, is already regretting the damage the Cameron’s decision will have.  Members of the Liberal Democrats and Labour party have condemned Cameron’s negotiation strategy and are remarking on the isolation that Britain has now been left in, without any allies outside or inside the Union. Nonetheless, as a member of the bloc, Britain has agreed to bind itself to regional regulations, employment laws and legal ruling and despite its many opt-outs, past allowances for rebates and its personal flexible interpretations of EU law, the UK must come to the realization that the EU is a supranational entity and not their privatized network of free trade profit mongering.

“It is thanks to Europe that London has got so much business.  50% of Britain’s trade is with Europe.  If the UK steps away from this, the long-term consequences will be extremely grace.” – Karel Lannoo, Chief Executive and Financial Markets Analyst at the Centre for European Policy Studies (CEPS)

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.

EU: The “Merkozy” Reforms

German Chancellor Angela Merkal and French President Nicolas Sarkozy, a dynamic duo commonly referred to as “Merkozy”, have agreed on a series of reforms to address the debt crisis and have proposed the creation of a new European treaty to go into effect by the end of March.

The Dynamic Duo, Merkozy

The statement from the leaders of the largest contributing markets in the EU came after the held crisis talks in Paris.  For the first time since “crisis talks” became the form for any meeting involving EU leaders, the talks have yielded a plan that has offered a glimmer of hope.  The plan combines elements of intergovernmentalism to appease many of the internal dissenters known as Euroskeptics in Germany and Northern Europe, as well as involving supranational elements to appease Sarkozy and his winning coalition due to the immediacy of French elections.  The announcement, coupled with the austerity measured unveiled in Rome over the weekend, led to Italy’s long-term borrowing rate falling below 6% on Monday, the lowest it has been since October.  The events have illustrated a series of good fortunes for the EU, hopefully foreshadowing momentum for reform and achievement for the single market entity.  The proposition for a new European treaty will be presented to Herman Van Rompuy, the President of the European Council, on Wednesday, ahead of a critical summit of all 27 EU leaders in Brussels on Thursday and Friday.  Evidently, the Merkozy duet has illustrated the progress possible through cooperation and integration; thus making evident the success of the Flexibility Principle, allowing any EU member nation to seek further integration with another, as well as the strength of perseverance of the two parents of the EU, France and Germany.

“We want to make sure that the imbalances which led to the situation in the Eurozone today cannot happen again.  Therefore, we want a new treaty, to make clear the peoples of Europe, members of Europe and members of the Eurozone, that things cannot continue as they are.” – Nicolas Sarkozy, French President

The new regulation being proposed by Merkozy is, in reality, a stability union.  At the heart of the treaty will be rigid rules to enforce the Euro’s original deficit and debt limits, initially set at 3% deficit and 60% debt under the Stability and Growth Pact.  For the Euro member nations that do not adhere to the new regulations for budget cuts, they will be persecuted by the European Court of Justice, punishments allowed under the Infringement Procedure.  The rigid guidelines and direct threat of fiscal punishment, as well as a loss of sovereignty  demonstrated the Germanic influence eminent in the proposal.  Merkel’s fiscal union is one-sided and legalistic, reassuring her Parliamentarian supporters that the EU would not gain more powers to intervene in the tax and expenditure decisions of countries which have secured their fiscal structure.  Nevertheless,  Sarkozy’s ideas of supranational supervision, fulfilling the requirement for a fiscal union, is also depicted through new sanctions and enforcement powers by the EU on any country whose borrowing has exceeded agreed limits.   So saying, countries like Greece, Italy, Portugal, Spain and Ireland which have already asked for bailout packages will lose a great deal of fiscal sovereignty.

“This package shows that we are absolutely determined to keep the Euro a stable currency and as an important contributor to European stability” – Angela Merkel, German Chancellor

Furthermore, the details of the plan consists of a series of 5 reforms aimed at restructuring the flexibility of the fiscal union, as well as an intensification of enforcement mechanisms and restrictions to ensure that deficits such as those in Greece will not be permitted or go unnoticed.  First and foremost, Merkozy propose automatic sanctions for any country which runs up a deficit of more than 3% of GDP.  This is to be followed by the implementation of what Merkozy refers to as a “Golden Rule” built into every Eurozone member’s constitution.  Thus, Eurozone members would have a constitutional obligation to balance their accounts, as a the rule forbids countries from persistently running a deficit.  Despite such escalated restrictions, these were previously included in the Stability and Growth Pact (SGP). Applied in 1997, the SGP limited deficit to 3% of GDP, but more concerning is that the SGP became more flexible and inconsequential after a series of reforms in 2005 and 2007 because of the inability of France and Germany to meet those set regulations.  Moreover, the SGP also limited debt to 60% of GDP but the Commission warned in 2008 that the average public debt in the Eurozone would reach 85% of GDP by 2010.  With the stark reality of Greece’s debt at 116% and Italy not far behind, the failure of the past haunts the future reforms as well.  Nonetheless, not be intimidated, Merkozy plan to give the European Court of Justice powers to supervise and punish any infringement.  The ECJ will verify that countries do not run a deficit and if so, new sanctions and intervention by the entity will affect only those countries and mark a loss of fiscal sovereignty.

“In this extremely worrying period and serious crisis, France believes that the alliance and understanding with Germany are of strategic importance.  Risking a disagreement would be risking the Eurozone exploding.” – Nicolas Sarkozy, French President

Moreover, the most critical sign of structural weakness and insecurity in the prolonged crisis were the losses sustained by private investors after being told to invest in Greece, despite EU reassurances by the EU for equal return.  The dependency on private investors ed to the volatility of the markets, depicting the EU in a series of chronic debt sales and credit downgrades.  So saying, the Merkozy proposal states that private investors will never again be asked to take losses, as in Greece 50% “hair cut”.  The proposal also calls for the European Stability Mechanism (ESM) of 500 billion Euros to replace the current bailout mechanism, the European Financial Stability Facility, in 2012; rather than the previously agreed upon 2013.  These changes to the ESM would usually require unanimity voting, but Merkozy instead has called for qualified majority voting of 85%. Lastly, the proposal also calls for the Eurozone leaders to meet every month, as long as the crisis continues, to discuss growth.

“We want to have an equal Europe, a Europe on the same footing and playing field.  And we do not want to make mistakes of history where perhaps too many decisions were taken without really taking the consequences into account.” – Nicolas Sarkozy, French President

Despite calls for the creation of a harmonizing debt bond under the idea of Eurobonds, the Merkozy duo have already agreed to dismiss the notion.  The controversial subject has already been ruled out by the European Central Bank (ECB), demonstrating a common idea that Eurobonds are in no case a solution to the crisis.  The creation of the common bond would undermine the significance of the calls for reform, debt restriction and fiscal supervision; as well as demeaning the efforts by France and Germany to cooperate at such great lengths.  Furthermore, the bonds would also be a reminder of the inability of Europa countries to make the effort and struggle to reduce their borrowing and reign in their prolonged crisis.  Similar to the buying of debt by the ECB, the bonds would represent a weakening policy that would only grant a short period of time to the member nations, a slight respite that would only perpetuate the inevitable resurgence of the crisis.

In retrospect, the glimmer of hope delivered by the Merkozy proposal may be short-lived considering the veto powers of the Council members, as well as the comprehensive reluctance to reopen the Lisbon treaty to reform, as desired by Merkel.  Nonetheless, the aggressive dedication and stubborn persistence of the Merkozy duo has allowed the EU to live as long as it had; therefore, such hope may serve as a bolster to EU supporters and defenders, allowing the EU to strive through its crisis and emerge as a stronger knit of interconnected countries bound together by past sacrifices and common ideals.

EU: Integration or Disintegration

Moody’s Credit Rating Agency has set the stage for the coming weeks, warning that crisis has escalated in recent weeks and has resulted in a negative scenario in which several countries of the European Monetary Union (EMU) could default and collapse out of the single currency union.

To Be Supranational, Or Not To Be?

In two ominous reports released on Monday, the credit rating agency noted the risk of a series of EU Member State defaults is no longer negligible. Coupled with the warning form the Organization for Economic Co-operation and Development (OECD), contagion risk among the sovereign nations and the looming fear of a credit crunch has a very real possibility of derailing the fragile global recovery that has been depicted by the 7 week trough in global stocks.  The OECD, a Paris-based thinktank, slashed its forecast for growth among its 34 members from 2.3% half a year ago to 1.6%, with Europe drastically downgraded from 2% to .2%.  The escalation of fiscal hysteria comes as media assets have illustrated the collapse of the Euro as having the ability to send the world’s advanced economies into a severe recession, dragging emerging markets with them into the slippery slope.  Consequently, with Italy’s debt nearing 1.9 trillion Euros and its 10-year bonds dropping to 7.18% from its previous high of 7.44%, the devastating critiques of the Eurozone are far from dramatizations and mark a clear realization that the 17 Eurozone countries are even wider apart on the measures required to staunch the exit of global investors and prevent an even worse scale of depressed economic forecast.  Evidently, the trepidation and precipice of fiscal ruin is demonstrating by the desperation of debt auctions being held not only by Italy, Spain and Belgium, but also by two of the largest economies in the EU, France and Britain.

“The Euro Area is approaching a junction, leading either to a closer integration or great fragmentation.  While limited by ineffective fiscal controls and a consensus-driven approach to crisis management, the Euro Area possesses tremendous collective economic and financial strength  We believe that an effective resolution of the crisis, accompanied by closer economic and financial integration, would help preserve the current ratings.” – Alastair Wilson and Bart Oosterveld, Moody’s Investors Service

Furthermore, fears are only being fueled by reports of a prolonged, deepened recession in which recession unemployment would soar and marked declines in activity.  According to an OECD report, the Eurozone is predicted to expand by a disturbingly low 0.2% in 2012, yet a worst-case scenario prediction has illustrated the Eurozone economy shrinking by 2.1% in 2012 and a further 3.7% in 2013.  Most alarmingly are warning that the crisis has the potential to tip the global economy into another recession.  The dangers of the crisis have been apparent in the volatility of the stock markets and the credit rating agency downgrades.  Nevertheless, the demonstration and violent protests orchestrated throughout Greece, Spain, Italy and Britain are the most influential evidence of the decaying stability and anarchic situation culminated by a prolonged fiscal crisis.  The UK has undergone public spending cuts, falling household consumption and weak exports, all of which have weakened the UK economy.  Reports predict a shrink of 0.1% in the last 3 months of this year and then 0.6% in the first 3 months of 2012.  This is complimented by a rise to 9.1% in unemployment by 2013, up from 8.3% today, leading to an increase in social problems and homelessness.  With the UK on the brink of a double-dip recession, the contagion is clearly spreading from the weaker periphery of the Eurozone to the once-stable core.

“This call for rapid, credible and substantial increases in the capacity of the EFSF together with, or including, greater use of the ECB balance sheet.  Such foreful policy action, complemented by appropriate governance reform to offset moral hazard could result in a significant boost to growth in the Euro Area and the global economy.” – Pier Carlo Padoan, OECD Chief Economist

Despite the trust and hope placed in the European Financial Stability Facility (EFSF) and the European Central Bank (ECB), the strength and efficiency of these entities depends on foreign interest in the agenda and progression models.  On Tuesday, the finance ministers of the Eurozone are to attend a meeting of the Council of ministers, seeking to agree on details leveraging the EFSF bailout fund so it can help Italy and Spain, should they need aid.  The guidelines for the  EFSF illustrate the rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and investment and funding strategies.  The objective of the ministers’ meeting is an attempt to boost the EFSF’s impact to 1 trillion Euros but those hopes are sinking due to spiralling bond yields, investor flight from Eurozone debt, and failure to entice investor governments in the far east to commit to the plan.  The meeting is likely to also approve the next tranche of emergency loans for Greece and Ireland.

“Policy making in Europe seems to be moving in the direction of further integration, which is positive, bu uncertainty remains about getting there in time to save the Euro.  A breakup of the Eurzone can be avoided, but bold measures are needed soon.” – Jose wynne, Analyst at Barclays Capital

In retrospect, the fiscal disunion of the supranational entity has illustrated the consequences of inadequate supervision and regulation; yet, the prolonged crisis due to delayed response has brought political integration and enlargement among the EU members.  Despite the exclusivity of the Frankfurt Group and the sideline actions of France and Germany, the dedication for resolution and rigid regulation exhibits the reformation of the supranational entity into a regulate and efficient union.  Moreover, the controversy of UK interference in fiscal matters and the ignored call for referendum illustrate the perseverance of the country to staying in the EU, as well as its resolve in its commitment to the EU.  So saying, the sacrifices by the individual members has cost many members their credibility, Selectorate support, political stability and countless harrowing challenged.  Nonetheless, it has also demonstrated the dedication of Member States to aspire beyond the complexity of intergovernmentalism and towards the even more complex and challenging elements of supranationalism.