Tuesday, August 16, 2011

Much ado about nothing?

And so passes another fatefully underwhelming summit on the eurozone crisis - at least as far as markets are concerned

You’d have thought by now that Sarkozy and Merkel would have learnt that holding a meeting without having anything meaningful to say is often worse than not having a meeting at all. Alas, that was not the case and markets dropped following the rhetoric filled press conference in Paris this afternoon. As ever, markets move infinitely faster than EU politicans can act.

However, the conclusions from the meeting do carry political significance, as they essentially reinforced German and French desires to press ahead with more centralised control over eurozone countries' economic policies (on Franco-German terms, if those can be agreed). The meeting also seems to be paving the way for turning Council President Herman Van Rompuy into more of a Franco-German puppet than what he already is, with a proposal floated to give the Belgian the effective chairmanship over the eurogroup, that now is to meet separately twice a year. It's politically significant as that would effectively institutionalise the eurogroup, which could have consequences for non-euro members, including the UK.

The discussion seemed to focus on long term issues and was lacking short term policies or any inventive ideas – not particularly surprising but by holding a meeting people, markets in particular, always seem to get their hopes up slightly, making the inevitable let down worse than it might have been.

The key points to come out of the discussion were:
• ‘No’ to Eurobonds right now from both leaders, although Sarkozy did suggest they might be possible one day (with more democratic legitimacy and as a last resort Merkel added). Notably, Merkel didn't seem to completely rule them out long-term.
• Refuse to enlarge the EFSF. Sarkozy suggested it is large enough and is now the suitable instrument to help save the euro (which is slightly delusional)
• Agreement to hold biannual eurozone summits and to elect (from within leaders - don't think for a second that voter will be involved) a eurozone president to sit for two and a half years (again, with Herman Van Rompuy as the likely candidate to fill the position initially)
• Will put forward proposals to include a debt brake in the constitutions of all 17 eurozone member states by the summer of 2012
• Reiterated their joint support for a financial transactions tax, possibly to help fund future eurozone bailouts (which would be big), plan to present proposals next month
• Create a common corporate tax base for France and Germany, to take effect from 2013 – interesting given the exemptions and confusion surrounding the French corporate tax rates and gulf between the French and German tax systems in general. Again, this is politically very significant in the medium-term.
• Emphasised need for struggling countries to enact necessary economic reforms and repeated their continuing commitment to defending the euro (nothing new)
• No plans to rewrite any EU Treaties, but Merkel also noted that the Lisbon Treaty isn't the "last EU Treaty we'll ever sign".
If this was a summit meant to convince markets, as they all seem to be nowadays, it looks to have failed off the bat - judging by the swift drop in US markets (good thing European ones were closed). But it was another piece in the evolving puzzle that is a Franco-German-led eurozone economic government, with more central control over taxation and spending policies (both Sarkozy and Merkel have floated this before, though France has historically been much keener than Germany on enhanced economic governance in the eurozone as opposed to at the level of all 27 member states).

We hastened to add that it might be worth sparing a thought for the ECB during all of this, given that the continuing failure of leaders to soothe markets (and possibly actually antagonise them) makes the ECB's job significantly more difficult, particularly in terms of bond buying. It's likely that markets could push up the Italian and Spanish cost of borrowing over the next few days forcing the ECB to purchase more than it intended to, thereby leading it further down the rabbit-hole of an opaque, bloated and risky balance sheet and into the realms of fiscal policy.

So to sum up: the meeting was politically important but economically irrelevant - at least in the short-term race to assure markets.

1 comment:

Rollo said...

Of course you are right that it is delusional to think the EFSF is big enough, at 440 billion Euros; it needs to be 4 trillion to work. But it is equally delusional to think that France is in a position to join Germany in the solution: France is part of the problem, and may well follow Cyprus, Italy, Spain, Belgium into the plug-hole of nations unable to live with the Euro. And it is equally delusional to think that the German voter will vote for buying up the whole of southern Europe by themselves. The meeting was held because one was demanded; not because these two dwarves of politicians had anything to contribute.