European leaders agree to fiscal union

Twenty years after the Maastricht Treaty, which was designed not just to integrate Europe but to contain the might of a united Germany, Berlin had effectively united Europe under its control, with Britain all but shut out.

Though not a perfect solution …
New York Times, Dec. 9, 2011

According to the Times, the unification of Europe under the control of Germany is not a perfect solution, but is nearly so.

Apart from that one passage, the language used throughout the article by the Times writers, Steven Erlanger and Stephen Castle, is so bland that you would have no hint that this treaty means the effective end of any remaining national sovereignty of the EU members. Only in one other sentence do Erlanger and Castle come close to the truth, when they say that “Chancellor Angela Merkel of Germany … pressed hard for a treaty that would codify and enforce debt limits and central oversight of national budgets….”

Central oversight of national budgets. The EU, controlled by Germany, controls each member state’s spending and taxing.

The EU had already controlled the social and cultural policies of the member states. Now it controls their national budgets as well, with Britain remaining slightly aloof from the New Order, for now.

Yesterday I quoted former European Commissioner and euro architect Jacques Delors’s remark that he knew that when the euro was instituted, it would lead to a crisis like the present, because the member states still had fiscal independence and would be reckless in their spending because they thought they would be protected by the euro. If he knew that the euro in the absence of fiscal union (which has been his true objective all along) would lead to the euro crisis, perhaps he also knew that the euro crisis would be “solved” by fiscal union. Is he that smart?

And, by the way, that’s the same strategy used by the Democrats with Obamacare. Since the American people were not willing to embrace all-out nationalized medicine, which has always been the Democrats’ goal, the Democrats created a half-way government takeover of health care that would be so unworkable and so destructive of the private health care industry, that the only recourse would be the complete government takeover of health care.

Here’s the article:

December 9, 2011
A Treaty to Save Euro May Split Europe

BRUSSELS—European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets. But efforts to get unanimity among the 27 members of the European Union, as desired by Germany, failed as Britain refused to go along.

In a day of historic, seemingly tectonic shifts in the architecture of Europe, all 17 members of the European Union that use the euro agreed to the new treaty, along with six other countries that wish to join the currency union eventually. Three stragglers, the Czech Republic, Hungary and Sweden entered the fold later, after a strong diplomatic push.

Twenty years after the Maastricht Treaty, which was designed not just to integrate Europe but to contain the might of a united Germany, Berlin had effectively united Europe under its control, with Britain all but shut out.

Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.

“It is a very good outcome for euro area members, and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,” Mr. Draghi said early Friday morning.

The support of Mr. Draghi and the bank to continue to buy the bonds of troubled large countries like Italy and Spain is crucial to buy time for their economic adjustment and restructuring, to reduce their debt and avoid a collapse of the euro.

The outcome was a significant defeat for David Cameron, the British prime minister, who had sought assurances to protect Britain’s financial services sector in exchange for doing a deal. President Nicolas Sarkozy of France said that “David Cameron requested something we all considered unacceptable, a protocol in the treaty allowing the U.K. to be exempted for a certain number of financial regulations.”

Mr. Cameron said, “What was on offer wasn’t in British interests, so I didn’t agree to it.” He conceded that there were risks with others going ahead to form a separate treaty, but added, “We will insist that the E.U. institutions, the court and the Commission work for all 27 nations of the E.U.”

The prime minister seemed to be betting that his unhappy coalition partners, the Liberal Democrats, would not bolt over the issue, and that calculation seemed to be right. On Friday, the party’s leader, Nick Clegg, said that as much as he regretted the turn of events, Mr. Cameron’s demands had been “modest and reasonable.”

The European Council president, Herman Van Rompuy, said that in addition, the leaders agreed to provide an additional 200 billion euros to the International Monetary Fund to help increase a “firewall” of money in European bailout funds to help cover Italy and Spain. He also said a permanent 500 billion euro European Stability Mechanism would be put into effect a year early, by July 2012, and for a year, would run alongside the existing and temporary 440 billion euro European Financial Stability Facility, thus also increasing funds for the firewall.

The leaders also agreed that private-sector lenders to euro zone nations would not automatically face losses, as had been the plan in the event of another future bailout. When Greece’s debt was finally restructured, the private sector suffered, making investors more anxious about other vulnerable economies.

Mr. Sarkozy said that the institutions of the European Union would be able to police the new pact, though Britain may dispute that.

Chancellor Angela Merkel of Germany, who pressed hard for a treaty that would codify and enforce debt limits and central oversight of national budgets, said the decisions made here would result in increased credibility for the euro zone. “I have always said the 17 states of the euro zone need to win back credibility,” she said. “And I think that this can happen, will happen, with today’s decisions.”

European financial markets strengthened mildly on word of the agreement. The Euro Stoxx 50 index, a barometer of euro zone blue chips, gained 1.5 percent, while broader barometers rose slightly, and stocks rose in early trading in the United States as well. The euro’s value strengthened to $1.3369, up from $1.3338 on Thursday. In the bond market, the borrowing costs of the euro region’s two most closely watched debt-ridden economies, Italy and Spain, were little changed.

President Obama said on Thursday that the European leaders’ efforts to reach a long-term “fiscal compact where everybody’s playing by the same rules” were “all for the good.” Yet he added, “But there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”

The best hope for providing that shot of confidence has been seen as the European Central Bank. But the bank’s president, Mr. Draghi, at a news conference in Frankfurt on Thursday, seemed to back away from signals he sent last week that a grand bailout bargain might be in the works—a big infusion from the central bank in exchange for a commitment to greater fiscal discipline from the European heads of state.

On Thursday, Mr. Draghi said that he was “surprised” that a speech he made last week had been widely interpreted as meaning the central bank stood ready to shore up weak European Union members like Italy and Spain by buying many more of their bonds—or to possibly work in concert with the International Monetary Fund. He played down the I.M.F. idea Thursday as too “legally complicated” and said it might violate the spirit of the euro treaty.

Many analysts were stunned by what appeared to be Mr. Draghi’s turnaround.

“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” Carsten Brzeski, an economist at the Dutch bank ING, wrote in a note to clients. “According to Draghi, it was up to politicians to solve the debt crisis.”

For now, Mr. Draghi appeared to have left the subject of government bailouts to the heads of state, while focusing the European Central Bank’s efforts on the less controversial business of keeping money flowing through commercial banks.

The main step the central bank took Thursday, which buoyed stock markets before Mr. Draghi held his news conference, was to cut its main interest rate to 1 percent, from 1.25 percent. That returned the rate to the record low level that had prevailed from 2009 until April. Mr. Draghi did not rule out the possibility that the rate could go even lower.

The central bank also announced additional measures to aid euro zone banks suffering from a dearth of the short-term lending and to avert a credit squeeze. The European Central Bank said it would start giving commercial banks loans for three years, compared with a maximum of about one year previously. Banks will be able to borrow as much as they want at the benchmark interest rate.

They must provide collateral, but the central bank on Thursday also broadened the range of securities it accepts, which will help banks that have large amounts of assets that are hard to sell. The central bank also eased its requirements for reserves that banks must maintain, which frees more cash.

In a sign of how badly banks need the money, 34 institutions took advantage of a new lower interest rate offered by the European Central Bank in conjunction with other central banks for three-month loans denominated in dollars.

Earlier Thursday, the Bank of England held its benchmark rate steady at a record low 0.5 percent, after the bank’s governor warned of growing risks for Britain’s economy from the euro area. Mr. Draghi, who took over at the European Central Bank from Jean-Claude Trichet on Nov. 1, has wasted little time reversing rate increases that Mr. Trichet oversaw in April and July. Those increases were widely criticized as an overreaction to tentative signs of inflation and may have helped hasten a widespread economic slowdown in Europe.

The economy of the 17 countries in the euro currency union is almost stagnant, growing just 0.2 percent in the third quarter, with unemployment at 10.3 percent. Economists expect the euro zone economy to slip into recession early next year if it has not happened already. Declining output makes the debt crisis even worse by cutting tax receipts.

The E.C.B. lowered its growth projections Thursday, saying that output could fall as much as 0.4 percent next year.

Lower interest rates will be particularly welcome in countries like Portugal and Italy, where the debt crisis has pushed up interest rates and made it harder for businesses to get loans. And the cuts will provide immediate relief to the many homeowners in Ireland and other euro countries who have variable-rate mortgages tied to the central bank’s rate.

But many economists continue to argue that ultimately the European Central Bank will have to intervene more aggressively in the region’s government bond markets, to prevent borrowing costs for Italy and other countries from becoming so high that they are unable to refinance their debt.

Posted by Lawrence Auster at December 09, 2011 01:16 PM | Send

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