Euro Disziplin may store up trouble

By Hugo Dixon
December 5, 2011

The euro zone will probably get another short-term fix at its summit this week. Exactly how the fix will work isn’t clear. But both Germany and the European Central Bank have softened their positions so much that some sort of solution is in the works. The ECB will probably cut interest rates and spray more liquidity at the troubled banking system; it may also step up its purchases of government bonds; and some scheme for assembling enough money to bail out Italy and Spain — probably by getting national central banks to lend money to the International Monetary Fund, which could then pass it on to Rome and Madrid – may be unveiled.

All this would be cause for celebration. The problem is the price that Germany and seemingly the ECB are demanding for their help: fiscal discipline, embedded in a treaty. Merkel wants the European Commission in Brussels to have the power to overturn irresponsible national budgets and for the European Court of Justice to fine governments that step out of line.

This idea for a treaty is stirring up all sorts of problems. One is that Britain, which is not part of the euro zone but is a member of the European Union, wants a quid pro quo for signing a revised treaty – probably in the form of returning powers over social and judicial affairs to London or getting some veto over the regulation of financial services, the UK’s largest industry.

An even bigger problem is the objection of many people in the euro zone to Disziplin being imposed by Berlin. Even France’s Nicholas Sarkozy, who is backing Merkel’s plan, has had to swallow hard before embracing a policy which would involve a loss of sovereignty, and is still wrangling over the details. The opposition socialists, which look likely to defeat Sarkozy in May’s presidential elections, have been quick to dub the plan an “austerity treaty.”

Handing powers to Brussels at Germany’s insistence isn’t popular with France’s right-wing parties either. In fact, it is likely to be pretty unpopular right across the euro zone. Even the president of the European Parliament, a body which normally supports anything that increases the European Union’s power, has said treaty change could be “dangerous” because citizens were unlikely to warm to the idea.

This is not to say that Europe’s governments won’t sign up to the German plan. Fear over what would happen if the euro collapsed is now so high that they will probably fall into line if this is what is needed to unleash the ECB. But a marriage based on fear is not the most attractive or most sustainable one. It will breed resentment. This could be expressed in the growing popularity of right-wing nationalist parties. There is even a chance that the proposed treaty changes, which will require unanimity, would be voted down by at least one parliament or torpedoed in at least one national referendum.

Merkel says she wants “more Europe.” But she is offering a lot less than the fiscal union that many pundits outside Germany are clamoring for. They want the euro zone’s governments to guarantee each others’ debt, by issuing euro bonds. A fully functional fiscal union would also have a large central budget that would transfer resources from booming regions to struggling ones. Germany’s chancellor is against these ideas for the simple reason that her people are not remotely ready to bail out other parts of Europe on a permanent basis. Nor, for that matter, are the Dutch, the Finns and some other nations.

Merkel’s idea of discipline is not in itself a bad idea, mind you. Governments ought to run their finances responsibly. The problem is that she is trying to achieve this through rules.  An alternative would be to impose discipline through the market. If bond investors knew that profligate states might have to restructure their debts in future, they might rein governments in before their debts got out of hand in the first place.

It might be objected that the markets did a terrible job holding governments to account during the bubble years. This is true. But that’s partly because governments gave investors artificial incentives to buy their bonds. There’s now a golden opportunity to set a new baseline for market discipline by making clear that investors will have to share the pain if a euro zone country racks up excessive debts. To be fair, Germany has been pushing this idea, but France wants it abandoned. Even if Berlin gets its way on this, it won’t be giving ground on the need for rules.

The discipline of the bond markets may not be an appealing slogan. But it is less unpalatable than the discipline of remote bureaucrats dictated to by Berlin. Europe’s citizens can probably understand that, if you borrow too much money, you have to dance to your creditors’ tune. Unfortunately, this doesn’t seem to be the way the debate is going. The price for a short-term fix could be a long-term problem.

PHOTO: German Chancellor Angela Merkel makes a point during her speech at the German lower house of parliament Bundestag in Berlin December 2, 2011. REUTERS/Tobias Schwarz

8 comments

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He who pays the piper calls the tune, as you say, and it seems that Germany wants that power permanently enshrined in treaty rather than temporarily enabled by fiddling and fudging and breaking the rules. What does that tell us?

And could one of the world’s most economically successful countries really not foresee, and thus prevent the outcome of the EU’s bribing of the nations with massive handouts and cheap, easy loans? I find that hard to believe, and once again ask: “What does that tell us?”

It seems clear that the eurozone countries are now so close to collapse that they will beg for salvation by the EU’s paymasters at a cost to their freedom that five years ago their people would never have tolerated. What does that tell us?

I think that, far from being in trouble, the EU is, like Desiderata’s Universe, unfolding exactly as planned.

Posted by SleepyJohn | Report as abusive

Finally commentators are starting to report on the will of the people. Italy & Greece are ruled by unelected technocrats. The history of European conflict wont be forgotten easily. We all sit uncomfortably together in the EU for mutual gain. Voters will never accept being governed by technocrats dancing to the tune of Merkel. Germany voters will not accept bailing out Club. The marriage of convenience may be nearing a separation.

Posted by MalcUK8 | Report as abusive

And so, without ever firing a shot or launching a missile Germany captures Europe. What a sad day for Europe, and what a lesson about socialism. This whole financial crisis has had all the subtly of flim flam and laughs covered by open hands.

Unions forcing higher and higher wages and benefits for their own greed, politicians and their pet projects and debts to political donors. It’s an inability to face the truth dead-on, and then deal with it.

Meanwhile, Germany sits there rubbing their hands together saying, “Sure, here is more money, just let us tell you what to do and everything will be alright.

Without firing a shot.

Posted by KenDen | Report as abusive

Maybe all will be saved on Friday by a combination of (1) increased fiscal control (voluntary, of course) of national governments (2) the bringing forward and rapid ratification of the ESM – again with agreement and clarification from Germany about modification both PSI and CACs; and finally (3) the granting of a banking licence to the ESM. so as to allow it to borrow directly from the ECB – a cosy, controlled and irrevocable package.

Finally, they can then apply ARTICLE 15:

Primary market support facility

1. The Board of Governors may decide, as an exception, to arrange for the purchase of bonds of an ESM Member on the primary market, in accordance with Article 12 and with the objective of maximising the cost efficiency of the financial assistance…

The only real problem is to decide the working capital of the ESM, and the squeeze to put on the 17 EZ members if things get rough internationally re the Euro.

If the EZ 17 ratify ESM with these modifications, then Drs Merkel and Schauble will have achieved their desired objective, no shots fired.

Posted by drjip | Report as abusive

Plan B,then Plan C,then Plan D,then Plan E,then turn it over to the Anti-Christ.Ha,Ha.

Posted by itolduso | Report as abusive

The global financial crisis was created by corruption on Wall Street, the US Congress, and the real estate industry and lenders. Fraudulent securities were exponentially multiplied and sold all over the world. Europe is now being forced within a few months to reorganize itself and is taking care to not leave itself vulnerable to more predation by investment banks and is trying to balance the need to meet immediate financial reforms with maintaining national sovereignties. Europe will survive intact. America may survive if it stops selling its soul to the devil for a few pieces of silver.

Posted by Greenspan2 | Report as abusive

Who will be willing to fight in the next war?

Seriously.

You have fianciers – who have never lifted a weapon in anger – making all of the decisions that result in the common man having to make all of the sacrifices.

Will the common man finally tell his son, “Stay home. This isn’t about national pride. This is about the financiers. Let them send their own sons and daughters. And after they die, we will kill the old financiers in their beds.”

Posted by FarRtWing | Report as abusive

Fourth Reich

Posted by myownexperience | Report as abusive