This week is being touted as the make-or-break week for the Euro and its Euro-zone - we did not get a Grand Plan in Cannes as Sarkozy had promised us, so now it seems we will get a Desperate plan instead.
The EU will always create 'something' which they believe they can sell as progress, but the problem is one of moral and political standards, or rather the lack thereof. Yes, you can buy time by printing money, you can try to fast-track changes to EU treaties, but you simply cannot run away from the dilution of standards from these desperate actions.
This weekend it dawned on me (and yes I am a bit slow) that the real issue here is not whether Europe gets a deal by late Tuesday night, rather it’s about how the EU can maintain any shred of credibility on its long-term ability to move the agenda beyond “saving Europe” to the longer term challenge of creating the next upswing in employment, growth and optimism.
This is not a question of the need for a crisis, though I do believe it’s the only way we get true progress, it is more about an alarming decline in standards of behaviour by those in power. Simply put, they have become loose cannons. The IMF can lend thousands of per cent of its SDR quotas, the FED can print trillions of dollars if they deem it necessary and soon it appears EU political shenanigans will see the ECB printing money in exchange for politicians in Europe doing what they should have done in 1999.
At its core, perhaps this is what the “occupy” movement is all about: it’s a protest against the violation of standards of behaviour by the ruling class, not just against the decisions they have made. And if that is the case, then I agree! We need debt brakes to stop the fiscal bloodshed, and we certainly need standards for how far central banks and politicians can devalue our hard earned, after tax salary by printing money.
A friend of mine posed a great question to a discussion forum recently: Is there any limit in this environment to what politicians/central banks can do - on monetary policy and decisions that will tax future generations? After considerable discussion, the general agreement was loud and clear: No!
This week, the EU’s Merkel/Sarkozy will try to force the move toward fiscal union using article 126 in the EU treaty, which basically gives the decision making forum of the EU Council the power to move and strengthen fiscal oversight. In other words, they will interpret a text slightly differently than it was intended as a means to an end.
The problem here is that it will be seen, ultimately as what it is: a total dilution of the originally intended standards of EU behaviour and indirectly it also puts us on the road to of transitioning from Euro-17 to perhaps the Euro-10. This move will result in a draw at best in my book, rather than a win for Europe.
Leaving my scepticism aside, these are the main issues for Europe at present:
Fiscal union
Strict rules on public finances. The open question being will it be Euro-17 only or for EU-27?
Leveraged EFSF
This is still under discussion. Market sees it as dead on arrival. Will IMF play a role?
Austerity
Public monitored and EU controlled programmes to cut deficits further in countries like Greece, Portugal and Italy
Opening of ECB’s vaults
Draghi last week showed his true colours by indicating that with a political framework properly in place, the ECB could be more helpful.
The full QE monty
Still possible?
And this week main events are:
Monday, December 5th:
- Italian cabinet approves deficit cutting reforms.
- Merkozy meet in Paris.
- Greek parliament to approve 2012 budget
- Sarkozy meets Tim Geithner and hosts centre-right European leaders in Marseilles (Merkel in attendance)
- ECB rate meeting (cut coming)
- Euro-zone summit begins: the 17th summit on EU debt
- Formal EU summit in Brussels.
The market believes that this is the week Germany decides solidarity is more important than discipline – the proof of this is in long Scandinavian and even US government debt trading at lower yields than German debt.
The real issue beyond the specifics of this week’s agreements is that we continue to have a problem of longer term solvency and this risks being yet another attempt to buy time and extend and pretend with liquidity. Let us all hope I am wrong and that this is step in the right direction, but I still have the feeling we are about to add a third new low point in the history of the EU history. The first was breaking the original stability- and growth pact, the second was the ECB’s intervention in the peripheral sovereign debt markets in May of last year. Now we have the third and perhaps final straw: no limits, and no accountability to voters, the investors and the future.
So the risk is that the EU wins the battle this week, only to lose the war down the road.