Yesterday’s publication of the Franco-German proposals for amendments to the EU treaty, aimed at stabilising the Eurozone were published in the official letter from Angela Merkel and Nicolas Sarkozy to EU President Herman Van Rompuy. The letter was built around four “main building blocks of the new Stability and Growth Union”, each discussed below. The content of the letter is already inducing significant political debate and the suggestion yesterday from a senior German official that he is “more pessimistic than last week about reaching an overall deal” will likely have been further cemented after reading subsections union’s national press this morning.
A strengthened institutional architecture
“Providing for a more integrated and more efficient institutional set up without duplicating existing European structures or institutions”. Ultimately a series of further or more frequent meetings of existing bodies and a new ministerial Eurogroup with the aim of more efficient preparation and implementation of decisions taken by the other meetings!
“People who enjoy meetings should not be in charge of anything” – Thomas Sowell
A comprehensive framework of prevention
Ultimately the ‘framework of prevention’ is a string of further coordination, surveillance and ‘positive’ incentives revolving around national balanced budget legislation, verifiable by the European Commission and a commitment to adopt recommendations from the wider union. This also amounts to a further push for harmonisation of competitiveness measures and will arguably be the biggest point of contention both within the EU17, where the proposal for harmonization of corporation tax will be a bitter pill for Ireland to swallow (The Irish Governments election pledge to keep the 12.5 percent Corporation tax, that it feels is the core facet of attracting international business) and at the EU27 level, where the proposal of a financial transaction tax (where the revenues raised disproportionally in the UK, due to the dominance of the city in global financial markets would reduce the competitiveness of the city in favour of New York and other financial centres outside of the EU – and the revenues will likely go towards the EU, and not towards reducing the UK deficit) will be a core focus of UK political commentators looking for UK PM, David Cameron to resist the short term benefits of eurozone stability in favour of the longer term prosperity and dominance of UK financial services.
“Liberty is the prevention of control by others” – John Acton
A reinforced procedure to enforce sound fiscal policies
Effectively this is a ‘procedure’ to correct the breaches of one of the core pillars of the Maastrict Treaty, a deficit of no more than 3 percent of GDP, and a public debt of no more than 60 percent of GDP. The procedure will likely involve a number of automatic sanctions and interventions “of increasing intensity”.
“Do as I say, don’t do as I do” – Phil Collins
A permanent crisis resolution mechanism
Lastly the letter proposes an acceleration of the ‘permanent’ intergovernmental European Stability Mechanism (ESM) which will ultimately be used to prevent the contagion and retain stability of the Eurozone as a whole in times of emergency. The specific and important caveat to this being that it is proposed to require only 85 percent of signed ECB capital, with a statement in the treaty that the private-sector involvement in the Greece situation was a “unique and exceptional situation”.
“If you’re not part of the solution, you’re part of the precipitate” – Henry J. Tillman
Merkel and Sarkozy sign off the letter by suggesting that “we need to act without delay”. The fact that they go on to suggest that new treaty provisions could be ready by the end of May adds further confusion, however, as ‘without delay’ in financial market parlance is considerably quicker than three months!
Ultimately the proposal is akin to the two biggest member states of the Eurozone taking a stand to control the way forward. The enforcement of “automatic” punishments for those who breach the limits of the treaty, and the harmonisation of taxes and labour laws will surely ignite political and ultimately social discord across the broader European Union. Whilst the official schedule for the EU summit seems more akin to a wedding schedule (an informal Dinner, ‘family photo’ and a working lunch… among the highlights) this week’s EU Summit is likely the most defining moment in the global economy at the current juncture. Friday from 3pm when we are expecting the press conference from the summit we may also find that unintentionally perhaps, fireworks are also on the schedule!
With an ECB meeting today and a good chance in my mind that rates are cut by 50bps the fireworks might even start before the meeting!
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