This is a new all-time low for the EU

More Steen Jakobsen, 8 hours ago12 December 2011 Non-Independent Investment Research I’ve got a few further comments on last week’s frantic push by the EU leadership to ram through promises of a March treaty change. Before we get started – important to declare that no, it still won’t work.

There is simply no way that Germany and France can implement the newly proposed “automatic policy” of debt brakes under the current EU framework. The EU Court of Justice and the EU Commission report to the full Euro Zone, meaning all of its 27 members. The UK, for example, can veto any and all changes to this, so again this is a plan for a plan until someone can explain how we can have a new treaty within the treaty without all 27 members on board.

The post-Dec. 9 summit environment leaves Europe widely divided but now in a three way split:

The EU Core: Mer-kozy Land. I doubt many countries want to be a part of this in the longer term....austerity without growth is the new buzz phrase here. EU Outsiders: Sweden, Denmark, and Czech Republic are the main countries. These countries are in doubt – should they side with Mer-kozy or the UK? As if that was a hard decision… UK: A vote on the EU would see the UK leave the EU and this would mark the first major break-down in the EU project. The UK remains by far the most powerful capital market and would gain relative importance for years going forward. We see signs of serious bidding in 12-month EURGBP puts already (meaning the market agrees with Cameron and disagrees with Mer-kozy).
There is nothing new in the new EU Plan - nothing!
This new plan simply does not address the core issues of the threat to peripheral debt defaults: there is still no prospect for true EuroBonds, the ECB will not print money, there will be no fiscal transfer between nations, there is no treaty change (despite plans for March) and there is no solution for a tri-party agreement moving the agenda.

Yes, the banking system will get more access to funds from special ECB operations, but the interbank lending market is a virtually non-existent. Our picture of a one-engine plane over the Atlantic remains the analogy of choice. (“This is your captain speaking – bad news is that three engines have just gone out (private liquidity), the good news is that we have one engine still running strong (public liquidity").

What now?
Already this morning, Germany’s Bundestag President Lammert told Der Spiegel that he will make sure that the decisions taken by the EU heads of government are consistent with an earlier ruling of the German Constitutional Court that defined limits on the extent to which fiscal sovereignty can be shifted to the European level. Good luck!

We are one step closer to my “meeting of the Cardinals” next year, a new and “final” summit that takes place as the EU is more or less forced to declare a kind of Chapter 11 and realign itself drastically to allow it to become a sustainable operation. This Dec 8-9 summit was a third low point for the EU. To recap those low points:

The original violations of the Growth and Stability Pact. Thank you, Portugal, Germany, France and Netherland (In order of violation) The May 2010 agreement allowing the ECB to intervene in the secondary bond market – making the ECB the only customer in Spanish, Greek, Irish and Italian bonds. The agreement to set up a new EU treaty inside the existing EU treaty (December 2011). That’s a tough one, Mer-kozy. Diluting Europe is hardly the long-term solution, and the “core” is no longer core when the spreading debt spreads have even spread to France because of its shaky fiscal outlook. Europe will inevitably face wide spread downgrades on this as the early talks from rating agencies is: Changes? Where Europe?
Sidenote: Denmark
The Danish fixed-rate link to Europe will come under attack, but if Denmark decides to be public, pro-active and transparent on policy, it should not become a major issue, as the rest of Europe is about to disintegrate under this complex attempt at a solution.

There is law of organizational theory that says that if you add a single business line, you will increase the organizational complexity by two! That’s Europe for you. The complexity is now so devilish that even the politicians are confused – right now in Brussels and Strasbourg the bureaucrats are searching through the EU laws and Treaties to find loopholes which mitigate the policy mistakes taken by Mer-kozy and Europe this past week.

To do business by “sneaking in” changes (fostering a treaty-within-a-treaty) hardly has anything to do with long-term solutions, like having technocrats running countries (Italy and Greece), or the new ESM being the new, new EFSF, when the supposed source of funds remains the same: nonexistent.

Politics in general has descended into a state of no accountability in Europe. The good news, however, is that we are reaching the outer limits of interventionism. In the EU, public money has now entirely replaced private money in the sovereign bond market, and banks are fuelled not by deposits from its customers, but by central bank liquidity as far away as the US, so It can only get better and soon.

It looks like 2012 will provide a low in this negative cycle which started in 1999/2000, where the world reached its effective peaks in production and growth. Since then, we have been financially leveraging the weak growth and inflicting enormous damage on our balance sheet while allocating resources to the wrong sectors of the economy. So as we sail across the rough seas of the next couple of quarters of crisis, it will be important to celebrate what will hopefully be recognized as the failure of interventionism and the very beginnings of a new and better cycle of employment, productivity and economic growth.

This latest EU Summit all but guarantees that 2012 will have a rough start, but hopefully it will also lead to Europe starting afresh once we see a “Meeting of Cardinals” in perhaps Q2 of 2012.

Safe travels,
Steen Jakobsen

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