Merkel and Sarkozy brewing Faustian pact

A new week, and a new episode in the eurozone cliffhanger is about to begin. Only democratic and legitimate government with sufficient powers at European level can lay the robust and politically acceptable foundations needed.

Euro bonds won't work without a political authority that backs them up, says the European Economic Policy blog, but continues that we have seen over the last week that the EU has no intention of establishing such a government.


In the Wall Street Journal, Irwin Stelzer states:

One thing is certain: The euro cannot survive without a major change in the governance structure of the euro zone.

In a fairly detailed blog post Arend Jan Boekestijn wonders if it is five past twelve, instead of five to twelve for the eurozone (in Dutch).

We are still not offered any useful and open information by the German and French governments, but we see more and more reports about a new disciplinarian code among eurozone governments in the making. The Wall Street Journal article adds important details to what it calls fiscal union.

The pact, it is hoped, could liberate the ECB to intervene massively in the bond markets, something many see as necessary to prevent the eurozone from collapsing.

Have I understood correctly? If things go bad – and they already have – this intergovernmental agreement would put in place a state of emergency in individual countries, based on their prior consent. Formally democratic government would be preserved, but the policies dictated by the pact.

For all we know, these extraordinary powers could be assumed outside the political and institutional framework of the European Union (and the eurozone) with nothing in the way of transparency and public debate to influence execution.

And we still have no convincing promises of democratic European level government where the national level has failed? A Faustian pact, if I may say, dear Angela Merkel and Nicolas Sarkozy.



Ralf Grahn

Olli Rehn on Annual Growth Survey, stability culture and eurobonds

In January 2011 the European Commission started the more integrated economic planning round known as the European Semester (Ecofin conclusions), by publishing the first Annual Growth Survey (AGS), the cornerstone document for better economic policy and governance in the European Union.

The Commission was able to start the second European Semester much earlier. The next AGS has now been published, although the Commission's Green Paper on eurobonds and other economic governance proposals stole the limelight.

Olli Rehn, who is now presented as vice-president of the European Commission and member of the Commission responsible for economic and monetary affairs and the euro, sketched the background in Berlin, Tuesday (SPEECH/11/782, English only):

Fiscal consolidation is a necessary but not sufficient condition to bring Europe back on track. Tomorrow, the Commission will present its view which reforms should be taken as a matter of urgency in our Annual Growth Survey, which kicks off the second annual cycle of economic policy coordination in the Union. First, of course, we address fiscal consolidation and the financial sector. We also outline which structural reforms are most necessary to jobs and growth, in particular as regards human capital, and how to make public administration more effective.

After discussing stability culture as the core principle of economic governance, in both monetary and fiscal policy, Rehn announced two proposals for the following day, aiming at further stability to fiscal policy of the euro area:

The first proposal underpins national stability culture by requiring numerical fiscal rules on the budget balance, in line with medium-term budgetary objectives of the Stability and Growth Pact. Such rules shall cover the whole government and be of binding, preferably constitutional, nature. You are right if this reminds you of the Schuldenbremse.

Moreover, we propose independent fiscal councils at national level to underpin robust budgetary planning. We also aim to complete the coordination of national budgetary cycles at the European level. In the so-called European Semester in the first half of each year, we evaluate the multi-annual budgetary plans at EU level. But for euro area countries, we need to make sure that the national budgets are in line with the obligations of the SGP before they are enacted. Thus the Commission should take a look at draft budgets by 15 October at the latest, and if needed issue its opinion.

Our second proposal is reserved for such euro-area countries that receive financial assistance. For them, the enhanced surveillance and the monitoring of programme conditionality will be required through law.

These proposals can be implemented within the current EU Treaties. But strengthening the Economic and Monetary Union further would require changes to the Treaty. The President of the European Council, together with the Presidents of the Commission and the Eurogroup, are now identifying what kind of changes the deepening of political and economic integration within the euro area may require in the longer term.

Rehn turned to the hotly debated eurobonds, in a manner tuned in to his German audience:

Tomorrow, the Commission will present a Green Paper on the rationale, preconditions and possible options of financing public debt through eurobonds – better called stability bonds. While the prospect of introducing stability bonds could help alleviate the sovereign debt crisis, I am also aware of the sometimes strong opposition against them.

For me, it is clear that any type of Eurobonds would have to go in parallel, hand in hand, by a substantially reinforced fiscal surveillance and policy coordination, as an essential counterpart. Stability Bonds would require that any step in the further sharing of risk would have to be balanced by provisions that ensure sustainable public finances and avoid free-riding on the consolidation efforts of others. This would have implications for fiscal sovereignty, which calls for a substantive debate in member states.

In other words, a profound reform of economic governance towards deeper policy integration is a necessary precondition for any serious move towards introducing stability bonds. Thus, the Commission's proposals tomorrow really constitute an interlinked package, which builds on the recent reform of economic governance and stability mechanisms, and at the same time outlines a roadmap towards the next stage of an ever closer and sturdier economic union, in both dimensions.

This comments offer a background to the publications the following day, and for future blog posts.



Ralf Grahn

Eurozone leaders talk and shares fall

This afternoon BBC Business News reports that Shares fall in Europe and US as confidence drops (18 August 2011).

Why are the markets so ungrateful after chancellor Angela Merkel and president Nicolas Sarkozy promised the eurozone ”economic government”, consisting of two annual summits for heads of state or government in the euro area, as well as constitutionally enshrined debt-brakes?

Perhaps the commentariat could give us a few clues.

Ambrose Evans-Pritchard's Telegraph blog post In defence of PIGS (17 August 2011) named the non-decisions succinctly:

No eurobonds, no fiscal union, no boost to the EFSF rescue fund, no change of policy on the ECB’s mandate. Zilch.

The LabourList post by Jon Worth argues that it is better to save the Euro and the EU through fiscal integration than provoke the mother of all financial crises: The Eurozone predicament is undesirable, not unexplainable (16 August 2011).

Professor Karl Whelan argues on the IIEA blog that it is certainly unlikely that a continent-wide campaign to pass rigid fiscal rules that run counter to textbook macroeconomic principles will do much to boost the Euro’s popularity: The Merkozy Summit – Bad Politics, Bad Economics (17 August 2011).

Vihar Geogiev writes on European Union Law that this proposal will not solve the urgent problems of the eurozone. Any further dodging of the eurobond issue will only add damage to the eurozone economy. The proposals on ”economic government” stay within the logic of intergovernmentalism, which is a recipe for failure: Dissecting the New Franco-German Proposal for the Eurozone (17 August 2011).

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While effective and democratic European level solutions remain officially banned, remember to check old and new comments on Bloggingportal.eu about the continuing eurozone descent.



Ralf Grahn

Merkel and Sarkozy: Eurozone letter to Van Rompuy

Yesterday morning the primary sources about our new ”economic government” were limited to video of the Élysée press conference and the press release from German chancellor's office.

Since then, we have more official materials about the proposed Twin Peaks ”economic government” of the euro area. The website of president Nicolas Sarkozy has posted the text of the press conference, with chancellor Merkel's remarks translated into French.

On this page you can choose the joint letter from Merkel and Sarkozy to Herman Van Rompuy, the president of the European Council, in French, English and German, which makes the proposals available in a more finely chiseled form.

The German chancellor's office offers a report of the summit: Deutschland und Frankreich für starken Euro. There is also a shorter English version: Germany and France in favour of European economic governance.

The press conference has been transcribed and the French parts translated into German: Pressekonferenz von Bundeskanzlerin Merkel und dem französischen Staatspräsidenten Sarkozy.

The letter to Van Rompuy can be found here as well: Gemeinsamer Deutsch-Französischer Brief an EU-Ratspräsident Herman Van Rompuy.

The same page offers links to the letter in English and French.

***

Yesterday I wrote three blog entries about the the summit between Merkel and Sarkozy, including interesting media reports and comments: Eurozone: Our new ”economic government”, Eurozone Twin Peaks ”economic government” in media and Eurobonds and eurozone reform rebound despite Merkel-Sarkozy summit.



Ralf Grahn

Eurobonds and eurozone reform rebound despite Merkel-Sarkozy summit

Chancellor Angela Merkel and president Nicolas Sarkozy can hardly have imagined that the issues of eurobonds and profound euro area reform would disappear, only because they swept them under the carpet yesterday.

After the official statements by Merkel and Sarkozy and my reactions to the proposed eurozone ”economic government”, we made a first tour of European media reactions to the Franco-German proposals.

Blogs and mainstream media contribute to our understanding of the challenges for the euro area and the European Union, beyond yesterday's announcements.


Protesilaos Stavrou

According to Protesilaos Stavrou, eurobonds are necessary, but first the European banking system needs to be cured and sovereign debt restructured: The eurobond is the only way forward – But under what conditions? (16 August 2011).


Jan Seifert

Jan Seifert invited readers to an intelligent discussion about how the eurobonds need to be constructed in order to contribute to solving the public debt crisis: How Eurobonds are the way forward (16 August 2011).


Pietro De Matteis

According to Pietro De Matteis, on the Europe Today blog (Ideas on Europe), it has become increasingly evident that there is no other durable solution for the European economy(ies) than to move towards further fiscal and budgetary integration: The Eurozone Council: are we a step closer to a European Government? (17 August 2011).


WSJ Europe

The Wall Street Journal Europe concludes that Merkel's and Sarkozy's eurozone plans stopped short of more fundamental steps toward refashioning the area into a federal entity that would issue its own debt, disappointing investors hungry for a more radical solution to the euro-zone crisis: Franco-German Proposal Disappoints (17 August 2011).


NZZ Online

Chancellor Angela Merkel has repeatedly changed course during the eurozone crisis, belatedly and too little at a time, say some. Have her initial positions been tactically aimed at reigning in profligate countries, or have later changes been signs of weakness? The coalition parties CDU-CSU and FDP are baffled. Almost paradoxically the opposition Greens and SDP are prepared to support more radical eurozone reforms, despite popular resistance, NZZ Online reports: Wenig Vertrauen in die Führung (17 August 2011).


Fabien Cazenave

Fabien Cazenave, on the Fabien l'Européen blog, writes that the summit offered stronger political signals than he had expected. He seems to think that the Ecofin Council will be marginalised, whereas I have understood that the heads of state or government want to overshadow the informal Euro Group. Anyway, the tenor of the proposals is intergovernmental, and Herman Van Rompuy will remain the captive of their decisions and non-decisions.

Are all the euro area countries really going to ratify the ”Golden Rule” of balanced budgets within a year? An EU-wide Tobin tax on financial transactions would need unaniomous approval (which could usher in an autonomous European Union budget), but do we really see the United Kingdom accepting that? The common tax rate for French and German businesses is the good news from the meeting, but we have to wait for the detailed proposals.

Cazenave ends his post by discussing some French reactions, as well as the need for parliamentary democracy: Réunion Merkel-Sarkozy : des propositions fortes, mais sont-elles les bonnes ? (17 August 2011).


Beyond Brussels

The daily digest of Beyond Brussels records that: Sarkozy-Merkel meeting failed on the markets (17 August 2011).



Ralf Grahn

Eurozone: Our new ”economic government”

The German chancellor Angela Merkel and the French president Nicolas Sarkozy, who met in Paris yesterday 16 August, propose no eurobonds or treaty changes in the forseeable future.

They are going to enhance economic growth, improve competitiveness and combat public debt by asking for two eurozone summits annually, to be chaired by a person nominated for two and a half years. They propose the current president of the European Council, Herman Van Rompuy as the chair of these summits.

Consequently the informal Euro Group, already eclipsed by eurozone summits 'ad hoc', would permanantly move even farther outside the limelight.

Public debt is the hard core of their proposals. The Stability and Growth Pact (SGP) should be strengthened by introducing a ”Golden Rule” of budget balance (Schuldenbremse) as a constitutional rule in every member state of the euro area, within a year.

Internationally, France and Germany want to impose a tax on financial transactions.

Both leaders describe their proposals as ”economic government” (gouvernement économique, Wirtschaftsregierung).

Merkel and Sarkozy did not even begin to address the lack of democratic legitimacy of their intergovernmental ”government”, or the absence of public support for its maze of treaty provisions, secondary legislation, intergovernmental coordination and peer pressure, political declarations and international agreements.

Can we expect the financial and stock markets to regain confidence?

President Sarkozy does not envision any new increase in the capacity of the European Financial Stability Facility EFSF to intervene.



See:

Zone euro : conférence de presse franco-allemande (video 48:29 min)

Deutschland und Frankreich für europäische Wirtschaftsregierung (Artikel, 16 August 2011), which refers back to the old communiqué 7 August 2011:

Deutsch-französisches Kommuniqué zur aktuellen Situation in der Euro-Zone (7 August 2011), about implementing the decisions by the eurozone summit 21 July 2011 and welcoming recent measures by the governments of Italy and Spain.

***

Bilaterally, in the spirit of the Franco-German Elysée Treaty the two countries continue efforts to harmonise their fiscal and economic policies aiming for greater convergence. They have set their sights on uniform tax rates for corporations, with detailed proposals due by 2013.



Ralf Grahn

Eurozone RIP?

Is the meeting today in Paris going to be remembered as the event which set in motion the chain reaction leading to the demise of the first eurozone?


Ongoing obstruction

Already the decisions of the 21 July eurozone summit to bail out Greece a second time and to beef up the bail-out funds (EFSF, ESM) are causing cracks in the government coalition. See Financial Times Deutschland: Koalition rangelt um erweiterten Rettungsschirm (13 August 2011).

The following day, the FTD editorial sharply criticised the parliamentary delaying tactics, which could lead to the break-up of the eurozone:

Das hält diese Währungsunion nicht mehr aus. Wenn die Beschlüsse von Brüssel nicht zügig parlamentarisch umgesetzt werden, war's das. Entweder wir akzeptieren die Transferunion - oder wir schrumpeln zu einem Hartgeld-Resteuropa, das sehr viel höhere volkswirtschaftliche Kosten zu stemmen hätte, als die Ausweitung des Rettungsschirms je verursachen könnte.

Was langfristig dennoch bleibt, ist die Frage nach der demokratischen Legitimation.

See: Tempo bei der Euro-Rettung (14 August 2011).


Potential mutiny

German chancellor Angela Merkel is facing a mutiny by her coalition parties CDU-CSU and FDP, if she moves on eurobonds. The German version of EurActiv offers a detailed overview of positions taken by German politicians, as well as others: Euro-Bonds: Pro und Contra zu gemeinsamen anleihen (15 August 2011).

After stark warnings from the parties, especially the Bavarian CSU and the liberal FDP, a government spokesman stated that the eurobonds were off the agenda of Merkel's meeting today with the French president Nicolas Sarkozy. See Deutsche Welle: Berlin and Paris snub 'eurobonds' despite growing support (15 August 2011).


Empty-handed leaders

According to a press release from the chancellor's office, Merkel and Sarkozy are working on common proposals to improve working methods and crisis management in the eurozone, but what are the leaders left with, when the Germany rejects the eurobonds and takes them off the table? See: Bundeskanzlerin Merkel trifft Staatspräsident Sarkozy in Paris (15 August 2011).

Despite a brief spell of optimism on financial markets and stock exchanges, what is going to happen when the leaders of Germany and France step out empty-handed?

RFI carries the telling headline: Programme minimum pour la rencontre Sarkozy-Merkel (16 August 2011).

Even if the German and the French side have publicly swept the eurobonds off the table, Spiegel Online International still yesterday started its customary review of German editorials by saying:

The issue of euro bonds will loom large at German Chancellor Angela Merkel's crisis meeting with French President Nicolas Sarkozy on Tuesday.

On the whole, the editorialists seem more nuanced and receptive to eurobonds (at least as a necessary evil), than the leading politicians of the government parties. See: Euro Bonds 'More a Band-Aid Than a Miracle Cure' (15 August 2011).

Deutsche Welle notes that the liberal MEP Guy Verhofstadt has called for Merkel to embrace eurobonds. Everybody is talking about eurobonds, well, almost everyone (except the German and French leaders). Given the current positions, the report ends by wondering how Merkel and Sarkozy are going to profile themselves as crisis managers: Alle reden über Eurobonds – fast alle (16 August 2011).

Not going away

In The Wall Street Journal Europe, Marcus Walker notes that Berlin and Paris have dismissed the eurobonds ahead of today's meeting, but continues:

But the realization is dawning in both countries that Europe may need radical change to save its common currency.

See: Eurobond Debate Rises in Germany, France (16 August 2011)

***

If the national leaders are too limited or weak to launch an effective and democratic eurozone, could Merkel and Sarkozy use the press conference to enlighten us about how the dissolution of the first eurozone is going to proceed and share their thoughts about what happens after that?

Interested, among others, are 331,965,504 eurozone inhabitants.



Ralf Grahn

Merkel and Sarkozy to meet - for what?

The German finance minister Wolfgang Schäuble is confident that the eurozone is not going to break up. However, he rejects additional support to euro area countries in distress and common borrowing (eurobonds), as long as countries still (mis)manage their own finances. The current decisions have to carried out. Deutsche Welle quotes an interview in Der Spiegel (which I did not find online), in: Finanzminister Schäuble lehnt Euro-Bonds ab (14 August 2011).

However, Financial Times Deutschland picks up the possibility of eurobonds combined with centrally determined fiscal and economic policies, as a last resort: Schäuble knüpft Eurobonds an radikale Reform der EU (14 August 2011).

Still, the economy section (Wirtschaft) of Spiegel Online and the business section of its International edition in English offer a lot of quality material on the global financial crisis and the euro crisis.

When leading politicians from both coalition parties mount a frontal assault as vehement as this on the European Central Bank (partly as a proxy for their government), we are left wondering about how the federal government of Germany can contribute to constructive solutions in the eurozone. See: Union und FDP attackieren die Euro-Zentralbank (14 August 2011).

Thus, what can we expect in the way of proposals from the meeting between chancellor Angela Merkel and president Nicolas Sarkozy Tuesday, 16 August? See: Bundeskanzlerin Merkel trifft Staatspräsident Sarkozy in Paris (11 August 2011).

Spiegel Online International tells us that 'Merkel and Sarkozy Are Damned to Get Along' (12 August 2011), with background provided by German editorialists. Approval of the decisions by the eurozone summit 21 July is far from sure in Germany. Saving the euro and the German coalition government seem to be in conflict.

Despite the internal difficulties, can and will Merkel contribute to a grand bargain introducing eurobonds? NZZ Online reports the repeated call by Giulio Tremonti, the finance minister of Italy, but also that the French president Sarkozy is promoting eurobonds: Seilziehen um die umstrittenen Eurobonds (14 August 2011).



Ralf Grahn