Draghi Statement on “Fiscal Compact”

Mario Draghi’s statement before the European Parliament is available here.   

Some key paragraphs from statement:

Yet we are at a difficult stage at present. We have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. And the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets.

Fundamental questions are being raised and they call for an answer. At the heart of these questions are not only the credibility of governments’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance.

I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.

What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.

We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.

On the precise legal process that brings about a move towards a genuine economic union, we should keep our options open. Far-reaching Treaty changes should not be discarded, but faster processes are also conceivable.

Whatever the approach, companies, markets and the citizens of Europe expect policy-makers to act decisively to resolve the crisis. It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.

104 replies on “Draghi Statement on “Fiscal Compact””

He gives a very narrow and anti-Keynesian description of the role of the ECB:

“we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability”

He sounds like Milton Friedman in this regard – has the Eurozone polity bought into this extremely restrictive, pure monetarist perspective? Perhaps that is a mistake, now and in the future.

Now let me guess which side he’s on in the Germany v France bunfight that’s about to get a bit more public airing….

looks like he wants a fiscal pact that effectively eliminates teh possibility of counter cyclical fiscal policy.

Combined with his view about monetary policy looks like a recipe for deflationary trouble in the periphery – defaults and/or high cost of funding for governments looks like the likely outcome

@ Gregory Connor

+1
At what point does preventing a global meltdown sync with price stability ?

Gregory,

Milton Friedman and Anna Schwartz wrote a book about people like Draghi. Surely Milton and Maynard would have agreed on these guys.

ECB officials use the term ‘price mechanism’ as the rationalisation for various extraordinary measures.

The optimistic view is that Draghi maybe signalling that the ECB would take new actions if agreement on a fiscal union can be reached.

Also systemic financial stability isn’t really a Keynes vs Friedman issue – neither man,nor their work allowed for the complexity and inter-connectedness of today’s global banking/financial system.

The fundamental issue regards rectification remains:
1) Sovereign writedown (needed for some/all PIIGS)
2) Bearing cost of said writedown

Wittering on abourt future fiscal rules (a mere part of a solution to prevent a future mess),is not at all helpful when the toxic uncertainty is in the here and now.

This is a monetary crisis, not a budgetary crisis. There is a massive monetary contraction going on, and the ECB is not doing anything to counter it. Trying to fight a monetary contraction with a budgetary contraction is bound to fail.

plagiarised directly from Bond. Eoin Bond on previous thread – 30 mins ago

*EU SAID TO EXCLUDE PRE-2013 BANK DEBT FROM WRITEDOWN PLAN
*CURRENT BANK LENDERS WOULDN’T FACE FORCED LOSSES IN EU PLAN
*EU MAY EXTEND EXEMPTION IF FUNDING SQUEEZE WORSENS, PERSON SAYS

No comment. What’s that I sense? Feels like a shiver of a tickle from a tentacle …. one is never more than ten feet or two nano-seconds from the tickle of a tentacle ….

@Gregory

I think we have to read a bit between the lines here. This is potentially a signal of a significant movement, one that I was not at all convinced they were institutionally aand politically capable of making. A key line is: ”
Other elements might follow, but the sequencing matters”.

Didn’t Robert Solow say “Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

Does everything remind the ECB of price stability ?

@ All

The most interesting comment, I find, is the following;

“On the precise legal process that brings about a move towards a genuine economic union, we should keep our options open. Far-reaching Treaty changes should not be discarded, but faster processes are also conceivable”.

The French want the budgetary rules to apply to everyone but themselves. The Germans, on the other hand, see no salvation for the euro – and they absolutely correct in this – other than in the concerted management of the three major EZ economies and are willing to bite the bullet. The idea that they show no flexibility is misplaced. They are, in fact, planning an expansionary budget, as they have been begged to do, and Schaeuble is being lambasted by the SPD for so doing. Hollande is being equally myopic in his public utterances regarding Sarkozy. But none can compare to Roesler who is intent on keeping attention on the FDP and has his own plan, which includes changing the Maastricht deficit criterion from 3% to 2%!

http://www.welt.de/politik/deutschland/article13744042/Roesler-entwirft-Fahrplan-fuer-eine-Stabilitaetsunion.html

The “faster processes” that Draghi is referring to are, one would imagine, contained in Article 126.14 TFEU where the Council, acting unanimously under a special legislative procedure, may alter Protocol 12 TFEU on the excessive deficit procedure. This would turn the protocol into a legislative instrument of the EU and, presumably, make it more clearly subject to interpretation by the ECJ. However, the text as it stands simply states that “The Member States shall ensure that national procedures in the budgetary area enable them to meet their obligations in this area deriving from these Treaties”. The ECJ is not being asked to intervene in national budgets, as Hollande has foolishly asserted, but simply to decide on any failure of a state to fulfill its obligations, which it does in many other areas.

The imminent collapse of Italy has concentrated minds wonderfully. Central banks around the world are now rallying to ensure there is no lack of liquidity in the banking systems. On the one hand this is good news and on the other hand it is an indication of how serious the situation is.

There is no way on god’s green earthly world that Frau Doktor Merkel will write a blank cheque to bail out the PIIGS. First and foremost the heavily indebted countries will have to balance their budgets and then enter into binding agreements, subject to verification that ensure that they will not back slide. Then they will be eligible for assistance and it will not be of the type than can be subverted by winks, nods, nudges that we are so familiar with in Ireland.

Put yourself in the shoes of a German taxpayer who has not received a real increase in salary for the past ten years. They look at Ireland and see a government and people living in fantasy land. The minimum wage cannot be touched, the professions are making twice as much as in Germany and four times as much as in Poland. The Public service is overstaffed and overpaid. The politicians themselves are overpaid along with all the quangos which are not adding value. Entitlement programs that need to be brought into line with what the country can afford. Only the people working in manufacturing are carrying their weight and are now subsidising the dead weight that government in Ireland has become.

@John McHale

Love the word ‘decisive’ from Mario – has a certain ring to it. Coming from the ECB it is almost as great a shock as Gregory Connor’s recent conversion to Keynes – s’pose we should be thankful for small mercies.

Maybe we should draft a new stability and growth pact, because the first one was so strictly adhered to. I don’t see a fiscal compact having effect, or I should say being carried out properly. The amounts being deleveraged from the eurozone and they are dithering about price stability.

Anyway, a new treaty would never pass in Ireland.

@ Mickey Hickey

+ 1

@ All

FYI

http://www.bloomberg.com/news/2011-12-01/eu-bank-writedown-plan-is-said-to-exclude-forcing-losses-on-pre-2013-debt.html

Notably the following extract.

“Last week, German Finance Minister Wolfgang Schaeuble suggested European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts”.

It is to behoped that Sarkozy does not go too far out on a limb this evening.

@Colm

Perhaps my comment was a bit harsh on Friedman, but he did have a one-equation view of the world, which missed a lot. Perhaps even he would see that the Euro-systematic problem at the moment is not just excess budget deficits. @ David O’Donnell – my recent conversion to Keynesianism – huh? I was James Tobin’s TA in the 1970s; my Keynesianism goes way back before many posters were born.

@ Mickey Hickey
There is no way on god’s green earthly world that Frau Doktor Merkel will write a blank cheque to bail out the PIIGS.”

There was no way on GGE that Frau Merkel would ever do a uturn on nuclear energy. That was the river . But then Fukushima happened. And it was the sea.

@Grumpy

It will be of immense comfort to so many unemployed Irish people that the last bailout was really for Lloyds and RBS. And RBS sponsors the rugby in return and all.

@Mickey
This liquidity thingy yesterday was all about peserving the credit loans already provided into existence & can therefore remain viable “going forward”.
The Banks do not want money spent into existence as this would deprive them of some of their money power.
QE for example is all about driving down the cost of money via excess reserves rather then spending new money which would in fact wipe out these credit “investments”
The official banks are happy with a depression if this disruption can peserve their asses as we can see in Ireland – they will and can interfere with the more natural stock & flow cycle to remain the King makers.
What Mario boy said was absolute nonsense and should be treated as such. – it is the banks taking fictitious capital from the future that has got us in this mess , not Goverments spending money now – anyhow much of the Goverments spending as been to bail out these credit vehicles , not providing wages , intelligent capital spending etc etc.
Indeed the Anglo Prom notes are the very opposite of 1930s Mefo bills for example as their reason for existence is to peserve past loans rather then develop future loans albeit be it for conquest rather then domestic development in the Mefo bills case.
That is what this austerity really means – taking consumption from today to pay for flawed criminal bets on future consumption – its a reversal of the pre 2008 world but with bank credit still remaining the premier money construct , very very sick me thinks.
Its a farce really – the entire post 60s liberal experiment is a epic disaster of the commons and for what ? – so that certain banks can maintain their fictitious books & fiefdoms !!
The sad thing about the 80s and beyond is that this was a measure of success rather then failure !! so the process was accelerated until they have created the greatest White Elephant the world has ever seen.
What can one say to Mario other then F$£K off.

@grumpy

Does UK exposure include IFSC transients?

I continue to try to make disctinctions between genuine sov and local fin_insts & IFSC fin_insts

@Gregory Connor

7_of_Nine delighted to hear that you have met “Q”.

@grumpy

and if so, is there any way of figuring out how much of it bears any ‘family resemblance’ to the UK parent, as Wittgenstein might have put it – in both English, and in the prior German version that we do know about?

@Seafoid
The lady is not for turning…
“Dec. 1 (Bloomberg) — German Chancellor Angela Merkel is set to snub investor pleas to back an expanded European Central Bank role in solving the debt crisis, as she pushes her demand for tighter economic ties in Europe as the only way forward.

On the eve of a speech to German lawmakers tomorrow outlining her stance before a Dec. 9 European summit, Merkel is digging in on her plan to rework the European Union’s rules to lock in budget monitoring and enforcement. That risks a showdown with fellow EU leaders and extends her conflict with financial markets looking for immediate measures to end the contagion.”

Crikey, first Enda says he’s deeply concerned, then John contributes two EZ-focussed threads in as many days, and today the Bank of England says it not only recommends banks to plan for a EZ collapse but that it, itself, is also actively contingency planning. And then we get this from the ECB president. Should we look out to see if it’s raining fire, frogs and locusts.

It’s serious so.

But the focus of Mario Draghi’s speech extract above is developing better fiscal discipline as a long term deterrent to instability, which is fair enough. In the long term.

The problem is the markets want to know who funds the present, where the bar on sovereign debt will be set – 120%, 100%, 80% – and consequently how much default will there be and if there is a practical fund of sufficient size to deal with temporary fiscal, debt, market hiccups. And they’re still doing the dance from “Jerry McGuire”

“Show me the money! Show me the money!”

@grumpy

“Any linguists care to deconstruct?”

In this case he’s using the word “compact” meaning to make or enter into a formal agreement with another party (or parties). It’s an unusual choice of wording. Perhaps it’s more widely used in Italian or this may be a formal translation for an Italian word that perhaps has a broader or more common meaning?? – I couldn’t say.

Of course, it may just be a display of intellectual arrogance (i.e. “I’m so smart that I don’t use simple words like the rest of you idiots in the EC”). I worked with a UK company a few years back where the upper echelons had a game they played – in every paper/report they wrote there had to be a word that would send the recipients scrabbling for the dictionary. They used to think this would be an incredibly good thing to do in their press releases and other comms material too (to be read by the general public/customers) – to which my response was usually to tell them that ‘bang’ they just heard was the sound of shooting themselves in the foot. I used to think they were the biggest bunch of tossers I’ve ever worked with… but I’ve come across worse since… unfortunately.

@ Ceterisparibus

She is simply putting a shot across Sarkozy’s bows with the message; “don’t burn your boats in Toulon this evening!”.

@ PR guy

I thought the use of the word “compact” Draghi was cosmetic

A compact is a cosmetic product. It is usually contained in a small, round case, with two or all of the following: a mirror, pressed powder, and a powder puff. The term is an abbreviation for “compact powder”. Eventually the more elaborate compact, the ‘vanity case’ became popular as it had more compartments for more makeup items.

http://en.wikipedia.org/wiki/Compact_(cosmetics)

And the ECB is making it up as it goes along.

@ Jagdip

Swiss considering “feasibility” of negative interest rates, cos there’s not enough monetary dynamics in play right now…

@DOCM
It may be working. Spanish 10 yr in 51bp and Italian about 30bp better. Back into safe territory (relatively). German 10 yr in 11 bp at 2.16% so that guy from goldmans got it wrong…so far.
I don’t believe Nicky will rock any boats tonight.

@seafóid

H’mmmm …..

“make up…… cosmetic……. vanity….. small….. pressed…contained”

You could be on to something there. Perhaps he belongs to one of those secret societies that run the world (you know, the ones George Bush senior and Tony Blair are in charge of) and these words all have a hidden meaning.

I’ve got it! He’s talking about Sarkozy!

Anyone know what time Nikki_Live goes curtain up – i’m interested in the body language, the napoleonic stance, and the direction of the clenched fists as he attempts to maintain the Gaullist franco-german intergovernmental grip on EU power that the CDU signatory to the Treaty of Rome, and first president of the European Commission, Walter Hallstein warned against.

Hallstein argued for a strong Commission President, and decision making Commission, as essential to future of EU democracy and EU integration. De Gaulle got him fired in 1967. Angela was in high infants in the East at the time, and a model student by all accounts.

European Union Give democracy a chance

1 December 2011 The Guardian London

Ulrich Beck – Leading German Thought Leader … author of The Risk Society – and ahead of the curve on the present global crisis

Europe already accomplished a miracle once before: enemies became neighbours. In the light of the euro crisis, the cardinal question must be confronted once again: how can Europe guarantee its citizens peace, freedom and security in the risk-storms raging in the globalised world? This calls for nothing less than a second miracle: how can the Europe of bureaucracy become a Europe of citizens?
…
Not long ago it was commonplace to speak in disparaging terms about the cacophony in the European Union. Now all of a sudden Europe has a single telephone. It rings in Berlin and for the moment it belongs to Angela Merkel.

http://www.presseurop.eu/en/content/article/1237691-give-democracy-chance

I can’t believe what I just read. Out of 736 MEPs, just 25 showed up to hear Draghi speak this morning. Given the current circumstances….. you would have thought…..

Crisis? What crisis? Where do I sign on for my daily expenses?

It seems to me academic economists live in their own world of wisdom totally disregarding the political economy – to their grave ignorance and whatnots.

I’ve noted earlier that the substantive crisis is between Merkosy because of French historical tradition of never ever…agreeing to transfer of fiscal authority from Paris!

Tonight Sarkoszy is on notice by ECB/Draghi as well as EP and its principal benefactor – shut up and give your full consent to a *genuine economic integration* ie. including fiscal and monetary union. Or face degradation of your soverign bonds and country rating. Basta.

Ecofin has more or less agreed on the elements of the agreed text for next Summit – brings all 27 together…and they will all have to agree on the way forward.

Oli Rehn has also given notice that there is only 10days left!

Was half of Draghi’s speech cut off?

“It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.”

………and that ‘design’ would be 🙂

@all [ta to PR Guy on timing ..

Tuned to Le President on FRANCE24 – a few points

* On ECB – more La Poule than Le Coq – independent; key role; EMF; qualified majority voting; deflation [chickened out in other words – no wonder the boys in Toulouse kept him away in Toulon – musta been afraid of contagion]
* First clenched fist 30 mins in with first mention of Germany; nod to Adenhaeur & De Gaulle … [Hallstein’s ghost groaned ….]
* he is meeting Chancellor Merkel in Paris on Mon to ‘Plan the Future of Europe’ (will 25 others stand idly by?)
*New Treaty – Golden Rule – Maastrict to be rewritten
*No mention of Europe up to 35 mins – with early side swipes at Greece, Italy, Spain, Portugal and Ireland [no mention in speech of other EU countries]
*Neu 1st Principle DISCIPLINE (nod to angela)
*Neu 2nd Principle Politics in the form of Qualified Majority Voting
*Globalization, Financial Capitalism, without Regulation created the crisis
*New Industrial policy (implicit critique of Ireland – musta known blind_biddy in the vicinity or he might have made it explicit)
*the Great UnSaid: FRENCH BANKS (other than deposit protection)

And for the French citizen serfs
Pension/retire age up from 60 ; working hrs up from 35; 1 in 2 civil servants to be replaced; social security to be re-structured …

I won’t bore the reader with the illusions of global grandeur that took up the first 20 mins as this was directed at 2012 election etc as indeed was the entire speech to a large extent ….

Conclusion: Nikki don’t wear the trousers in MerKozy.

Or:

As Mae West put it to Angela when she first met MerKozy: “What a lovely little boy – Is he yours?’

@French Friends of Long Standing

Time for a change!

@DoD

“And for the French citizen serfs
Pension/retire age up from 60 ; working hrs up from 35; 1 in 2 civil servants to be replaced; social security to be re-structured …’

I work with a Francais and he said today that already in Marseille trouble is brewing. Police went to the scene of a robbery the other day and were attacked with Kalashnikovs. Sarko was always tough on law and order and France was always quiet under Sarko…

@ All

FYI

http://www.ft.com/intl/cms/s/0/b1e05d32-1b67-11e1-85f8-00144feabdc0.html#axzz1f64mf0ut

This assessment is supported by Sarkozy’s performance in Toulon. He is meeting Merkel on Monday. The key element in his speech is the reference to sovereignty.

http://www.elysee.fr/president/les-actualites/discours/2011/discours-du-president-de-la-republique-a-toulon.12553.html

“Ayons conscience que si nous échouons à changer ensemble les règles du jeu, le monde risque de sombrer dans le chacun pour soi et le protectionnisme et nous irons à la catastrophe, parce qu’alors nous risquons de refaire pas à pas le chemin tragique qu’a emprunté le monde dans les années 30.

Il y a une réalité que chacun doit comprendre, que chacun doit accepter : la souveraineté ne s’exerce qu’avec les autres.

L’Europe, ce n’est pas moins de souveraineté, mais davantage de souveraineté parce que c’est davantage de capacité d’agir.

On défend mieux sa souveraineté avec des alliés, que tout seul. C’est la grande leçon de l’histoire du XXème siècle. Renoncer à notre place de membre permanent du conseil de Sécurité et à notre droit de véto ne serait ni plus ni moins qu’une faute. Nous n’aurions pu aider les peuples de Libye et de Côte d’Ivoire à se libérer.

La France et l’Allemagne, après tant de tragédies, ont décidé d’unir leur destin, de regarder ensemble vers l’avenir. Revenir sur cette stratégie serait impardonnable.

L’histoire et la géographie ont fait l’Allemagne et la France rivales ou partenaires. En faisant le choix de l’amitié le Chancelier Adenauer et le Général de Gaulle ont fait un choix historique.

L’Allemagne et la France unies, c’est l’Europe toute entière qui est unie et forte. La France et l’Allemagne désunie, c’est l’Europe toute entière qui est désunie et qui est affaiblie. Je recevrai lundi prochain à Paris la chancelière Merkel et ensemble nous ferons des propositions pour garantir l’avenir de l’Europe.

Chacun a son histoire, chacun a ses blessures. Quand on parle de la monnaie, l’Allemagne se souvient de son histoire. Nous devons la comprendre et nous devons la respecter.

Chacun a ses institutions, sa culture politique, sa conception de la Nation. L’une est fédérale, l’autre est unitaire. Il faut comprendre cette différence. Il faut la respecter.

La France et l’Allemagne ont fait le choix de la convergence. Je ne reviendrai jamais sur ce choix. Cela ne veut pas dire que l’une veut se mettre à la remorque de l’autre, ni que les deux veulent renoncer à leur identité jusqu’à se confondre.

Le choix de la convergence, ce n’est pas celui de l’imitation mais celui des leçons tirées en commun de l’expérience de chacun.
Le choix de la convergence c’est celui du travail en commun, de l’effort partagé pour construire au cœur de l’économie européenne une zone de stabilité et de confiance qui sera le moteur de la compétitivité européenne. Je ferai tout pour qu’il en soit ainsi.

L’Europe n’est plus un choix. Elle est une nécessité. Mais la crise a révélé ses faiblesses et ses contradictions. L’Europe doit être repensée. Elle doit être refondée.

Il y a urgence. Le monde n’attendra pas l’Europe. Si l’Europe ne change pas assez vite, l’Histoire s’écrira sans elle.

C’est la conviction de la France et de l’Allemagne.

L’Europe a besoin de plus de solidarité. Mais plus de solidarité exige plus de discipline.

C’est le premier principe de la refondation de l’Europe.

Car la solidarité ne doit pas être un encouragement au laxisme.

L’Europe a besoin de plus de politique. Je veux dire de plus de responsabilité politique.

L’Europe sans politique, l’Europe en pilotage automatique qui ne fait qu’appliquer aveuglément les règles de la concurrence et du libre-échange est une Europe qui ne peut pas faire face aux crises. C’est une Europe désarmée. C’est une Europe qui est condamnée à subir. Cette Europe-là, nous n’en voulons pas.

L’Europe a besoin de plus de démocratie. Parce que l’Europe est une entreprise qui ne peut pas réussir sans les peuples. Parce que si les peuples se méfient de l’Europe, l’Europe reculera. L’Europe plus démocratique, c’est l’Europe où ce sont les responsables politiques qui décident.

Plus de politique, c’est le deuxième principe de refondation de l’Europe.

La refondation de l’Europe, ce n’est pas la marche vers plus de supranationalité. Ce n’est pas la réouverture des vieilles querelles entre les partisans de l’Europe des nations et de l’Europe fédérale.

L’Europe se refondera en tirant pragmatiquement les leçons de la crise. La crise a poussé les chefs d’États et de gouvernements à assumer des responsabilités croissantes parce qu’au fond eux seuls disposaient de la légitimité démocratique qui leur permettait de décider. C’est par l’intergouvernemental que passera l’intégration européenne parce que l’Europe va devoir faire des choix stratégiques, des choix politiques.

Au sein de la zone Euro, il nous faut décider maintenant aller sans crainte vers davantage de décisions prises à la majorité qualifiée”.

In short, he appears to have has pulled it off.

Of course, he has no explanation for the loss of half-a-million industrial jobs in France over the past five years under his watch. It is notable, however, that only Aubry and Le Pen were put up to react immediately, both of whom did badly. Both Left and Right are unanimous in condeming the remarks of Montebourg making references to “the return of Bismarck”.

“Ayons conscience que si nous échouons à changer ensemble les règles du jeu”

Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows

@DOCM

Je recevrai lundi prochain à Paris la chancelière Merkel et ensemble nous ferons des propositions pour garantir l’avenir de l’Europe.’

Ou sont les autres? Le 25? Only suprise is that he resisted the royal ‘WE’

What did he pull off? Other than his briefs – written by same nationalistic speech writer who did the biz for him three years ago.

So we get a permanent loss of fiscal manoeuvre once debt breaks are in. In fact, we are condemned to permo contra cyclical monetary policy. Moreover, there is no central fiscal fund to smooth the cycle. In return, we give up what. Taxation, labour Market flexibility & god knows what else.
Can we have a vote on this?

I listened to the the speech (being translated) on sky.
Great scene setting etc. He almost got to the root cause (globialization) but what solutions has he proposed.

To me he has come down fully on the side of austerity. Not only that but on the expenditure cuts side of austerity. I am not sure of the rest and I am uneasy with the google translation of the following passage: How does it really translate in real politique, particularly the last sentence.

“L’Europe se refondera en tirant pragmatiquement les leçons de la crise. La crise a poussé les chefs d’États et de gouvernements à assumer des responsabilités croissantes parce qu’au fond eux seuls disposaient de la légitimité démocratique qui leur permettait de décider.

C’est par l’intergouvernemental que passera l’intégration européenne parce que l’Europe va devoir faire des choix stratégiques, des choix politiques.”

@ David O Donnel,
I dont think he did resist the royal we-“et ensemble nous ferons des propositions” etc

@John McHale

I think we have to read a bit between the lines here. This is potentially a signal of a significant movement, one that I was not at all convinced they were institutionally aand politically capable of making. A key line is: ”Other elements might follow, but the sequencing matters”.

It is a carefully constructed speech, as you would expect, but all the statements about compacts/sequencing etc. are all within the context of fiscal governance and are about what governments could or should do, and not about what the ECB could or should do. The new compact is one for governments to undertake (“would be the most important signal from euro area governments”), and is to stand in parallel alongside the monetary compact that ECB has already undertaken. This is essentially the same message that Trichet has been hammering on about for a long time (“quantum leap” etc.) albeit without the elitist, pompous and arrogant delivery, which is a welcome change. In my view the “other elements” part is about other elements that governments might take (e.g. Eurobonds of some sort, further contributions to EFSF etc.) rather than any changes of direction from the ECB on their bond-buying principles, for example, or their role as a LOLR.

Within an Irish context, it seems to be your view that that the Euro is in imminent danger of collapse, and that Ireland should immediately agree to fiscal controls to keep the show on the road a bit longer and hope that the ECB will change its view on its own role as LOLR and effectively extend this to sovereign solvency from bank liquidity. What is completely missing is a discussion on what type of controls are acceptable, the institutional structure by which these controls will be imposed, and the democratic process by which any such additional controls should be authorized by the people they will impact.

It is important, as Draghi alludes to, to start with a credible and coherent picture of what the final steady-state solution is, and work backwards to determine what the intermediate and immediate next steps should be. What are the levels of external control in Irish budgets that the Irish people are prepared to accept? Is it acceptable for specific tax increases and spending cuts to be externally imposed (and which are explicitly mentioned in some of the drafts floating around)? What is received in return? What will this do to democratic legitimacy and popular support for government dictats?

Shane Ross has raised these issues in the Dail in the last couple of days, and has been answered with extremely weak responses from Enda Kenny, who is further and further giving the impression of being completely out of his depth when operating in an EU context. Basically Enda Kenny’s view is that there is an immediate crisis and we shouldn’t be discussing anything longer term in public, and his view is that on the immediate crisis is that the ECB should do something, without saying what this is (other than that they have an “infinite firewall” that they can use). This is exactly the sort of kick-the-can to get through Christmas approach that could lead to a further ceding of Irish sovereignty without really knowing what is being ceded, and why it is being ceded. Shane Ross is asking the right questions, and is not getting any coherent answers.

This is all about sustaining the bank sectors extreme leverage and thus control over the real economy – nothing more.

Fiscal austerity means more 40 to 1 leverage with the great shocks that accompany this criminality and the rush to make banks whole every time there is a new crisis.
Fiscal compact means bank slavery.
If they are so anti goverment money they should bid gold up to the M1 tommorow – they are inconsistent in their diagnosis not because the are Quaks but because they are criminals.
A many headed Hydra of bit players , leeches and Godfathers.

What is truly remarkable, even frightening, about Draghi’s speech is that it scrupulosly avoids mention of ’employment’, ‘unemployment’ and ‘growth’. Did no one notice this family of absent elephants?

Presumably, the new head of the ECB has categorised such phenomena as too minor, or perhaps too delicate, to draw to the attention of his audience, many of whom know economic difficulty as something others experience.

It is lamentable to see so much attention being paid to a speech that avoided addressing and persistent existential difficulties.

@ All

Germany, France and Italy add up to 70% of the EZ. If they cannot get their ducks in a row, then it is game over. The ordering of the speech of Sarkozy is significant. He started with the sovereignty issue.

“L’Europe, ce n’est pas moins de souveraineté, mais davantage de souveraineté parce que c’est davantage de capacité d’agir.

On défend mieux sa souveraineté avec des alliés, que tout seul”.

“Europe is not less sovereignty but more sovereignty because it provides a bigger capacity to act. One defends one’s sovereignty better with allies than alone”.

The reading I have of this is that he is preparing the ground for any concessions involving moves where sharing sovereignty arises viz in a supranational context under the Community method.

The rest is window-dressing. No one is suggesting any changes to the remit of the European Council and the inter-governmental manner in which it gives impetus to what is done under the Community method. But it is specifically precluded from adopting legislation (Article 15.1 TEU). References to more qualified majority voting are meaningless except in a Community method context. Inter-governmentalism implies unanimity and the Germans have learned an expensive lesson with regard to its use and limitations if they have to start discussing changing their constitution to get the government out of the clutches of a reactionary and euro-sceptic constitutional court.

As to the ECB, and the opinions expressed above, I would recommend again the opinion piece by Otmar Issing in the FT. An institution of the EU must stick to its legal remit. It has no choice in the matter. And any changes to it have been specifically ruled out.

It seems to me that the outcome next week will be a whole series of interlinked concessions and an eventual compromise. But an immediate big bazooka of some sort in order to convince the markets will be required. There are two – probably combined – that suggest themselves e.g. adaptation of Protocol 12 on the excessive deficit procedure and final agreement on the ESM and the thorny issue of PSI.

Further treaty change, probably requiring the convening of a convention, will undoubtedly also be on the menu. But that is for the medium-term.

Other players could then take their appropriate place on stage, ECB, IMF etc.

It is, however, early days. Whatever Merkel and Sarkozy agree Monday, they will have to convince all 27 of.

@The Alchemist.

What is truly remarkable, even frightening, about Draghi’s speech is that it scrupulosly avoids mention of ‘employment’, ‘unemployment’ and ‘growth’.

That would be a fiscal governance matter.

I think all the signs are that Draghi will much more tightly define the role of the ECB than did Trichet, who at the end was writing letters, by himself, to sovereign governments dictating what they should do in return for his SMP purchases. Trichet thought of himself as some sort of proto EU Finance Minister. Draghi wants to keep inflation at or near 2%. Everything else is somebody else’s problem.

Joseph Ryan

The last sentence: continue with an enhanced franco-deutsche dictatorship of Europe – a central tenet of Gaullism since the Treaty of Rome. Europe will never integrate under Gaullism …

Other 25 need to wake up – and go for Commission, an elected EU President, and form a democratic counter-balance …. no sign of it yet .. democracy not alone downgraded to junk but not even on the agenda any more …. total financial system takeover of the EU days away …. and executive turkeys will vote for XmAS

@Bryan G

… nor around here with the ‘sit tight, say nathin, hush hush’ that you identify.

@PR Guy etc
Nor in the EU Parliament – incredible attendance for Draghi speech.

Dire Straights alrite …

@DOCM

Issing – the consultant to the MatrixsQuid! I’m beginning to wonder ….? Spose I’ll have to read it now …

Just catching up with things and it seems nothing of any import contained is the speech by Nicky.
The interesting piece I read in the WSJ today (print edition) concerns the central banks intervention, apparently the Fed met with major hedge fund guys in September where they suggested coordinated central bank action to ease the euro crisis. So the Fed is Running European monetary policy at the behest of hedgies.

If I had a DeutscheBanke CDS – I’d trigger it. Then we would find out that there was an insufficieny in the deutsche financial system and the carriers of the CDS (figure it out) on Wall St had insufficient funds to honour it.

Who spins? Who counts? Who Controls?

@Bryan G

You raise very important questions. I doubt my answers will be satisfactory, but I will try to explain my position a bit more.

You are right that I believe the euro zone is in real danger. The creditworthiness crisis has been spiralling out of control, and the longer it goes on the harder it is to fix, as potential investors retreat further and further from euro country bonds and banks. The reason I am so concerned is that I believe Germany and the stronger countries have a real choice to make. Leaving the euro zone would be hugely costly; but potentially so too would taking on the very large contingent liability that would be required to effectively guarantee the debts of all euro zone countries. When it comes to it, I find it hard to see them taking the first option. But if they wait too long the crisis may have developed such momentum that it becomes the least bad option. It is hard to know how costly a euro zone break up would be for us, but I feel there is a significant probability of it being a real disaster for living standards.

As I read the politics, Germany and the other strong countries — and it seems also the ECB (though I understand your doubts) — are willing to take on the contingent liability, but only with the degree of insurance that comes with greater controls over deficits. While you raise absolutely valid concerns about what this actually means, I don’t think we can set aside the risks associated with the alternative. I know what I am about to say will offend people (so this time I apologise in advance), but we must be careful not to go too far down the self-indulgent road of only pointing to the downsides of more central controls and not recognising why they might be necessary.

You are right, of course, to ask what exactly we would be signing up to. As I see it, it should be sufficient for the controls to be macroeconomic in nature: limits on deficits, requirements for debt reduction, expenditure growth ceilings in line with trend output growth (unless those expenditures are matched by revenue increases). There should be no need to dictate the mix of expenditure and taxation, and any such dictats should be strongly resisted. Unfortunately, we have little choice but to pursue many of these fiscal control measures anyway, if we are to have any chance of freeing ourselves for the kind of intrusive supervision we have at present, and avoiding what could be a costly default. The Government will be introducing a Fiscal Responsibility Bill early next year in any case, which hopefully will move us towards a set of fiscal rules designed to ensure sound fiscal management over the longer term. Moreover, though we are down at the moment, I hope we can rebuild things to be one of the stronger euro zone members in the future. Given that we would also be guaranteeing our partners, we too have an interest in limiting the size of the contingent liability for others that we would be taking on.

Having said all that, your concerns are absolutely valid, and the more information we can have about what we are signing up to the better. While there is a big risk it would be defeated, all things considered I would support a referendum on any major changes in the operation of the euro zone and the broader EU. I just hope that we could approach it with a degree of balance. Again at the risk of giving offense, it is very easy for populists to take over this debate. I fear the dangers of the current course would too easily be forgotten.

@John Mc Hale
“You are right that I believe the euro zone is in real danger. The creditworthiness crisis has been spiralling out of control, and the longer it goes on the harder it is to fix, as potential investors retreat further and further from euro country bonds and banks”

A bit extreme I would venture having reviewed today’s bond prices …France at 3.08% in 29 bp, Spain 5.66% in 51 bp and Italy 6.61% in 37 bp. Investors are still buying the outer core.
Maybe Angela’s medicine is working.

@John McHale.
Of course. However, investors seem to have increased confidence in Spanish and Italian bonds and indeed French bonds today. Maybe it is a turning point…or maybe I’m reading too much into a remarkable one day turnaround.
If you look at German yields today…0.02% for 1 yr and 2.17% for 10 yr it seems to suggest that the long end is suffering.. Probably because investors consider that Germany will have to pick up a large tab eventually.

But enough of that optimism…I have just read Jeremy Warner in the Telegraph and his take on the situation concludes..
“When someone borrows far more than they can ever repay, ultimately the creditor always takes a haircut. Essentially, that’s what the eurozone crisis is about. The debtors are already insolvent, and the creditors find their own solvency threatened by the insolvency of their debtors. If Germany cannot find an orderly way of burden sharing with its fellow eurozone members, then it will be done in a disorderly way. Whichever it is, Germany will end up paying through the nose. It’s only a question of degree.
The oddest thing about it is that Germans have not yet intellectually grasped this simple choice.”

@ceteris

from Warner … ‘oddest thing about it is that Germans have not yet intellectually grasped this simple choice.’

‘Germans’ is too universal here – much more tha a few influential power and intellectual brokers have grasped the issues intellectually … and I’ve poste a few of them on this blog from time to time. they are up against the ‘spin’ ‘story’ that Dr Merkel, and especially her FDP and CSU allies have ‘sold’ to the German public sphere since 2008 which is not based on either facts or reality; in this she has been aided by the German Financial System gripped with fear that it could not handle its losses due to dodgy derivatives and unregulated, and profitable, capital flows via credit to so called peripherals, including Ireland. These intellectually tuned powerbrokers also include key members of the Industry Federation ……

Germany is both part instigator of present mess and part of solution – as are all other 26 members of the EU. In her own way, Dr Merkel is as Guallist as De Gualle and more so than the pretender Sarkozy. Gaullism will never unite Europe ….

@German Friends of Long Standing

Time for a change!

@John McHale

Yes – things are more than serious. I’m a 99% dyed in the wool believer in Europe – and I’m now considering and contemplating UDI with the other 1%.

@DoD
With the greatest respect David these actors are no Gaullists – they are creatures of the markets and not the state.
Give me a union of independent European states with the power to create state money that cooperate in science , commerce etc any day over these pathetic pawns of bankers.
They do not even have to be led by the nose David.

The Litmus test for any President in a republic is how many assassination attempts are made on his person.
Even the crook Chirac had one attempt made on him confirming to myself he had a bit of class – Sarkozy is a Stooge

@John McHale

I know what I am about to say will offend people (so this time I apologise in advance), but we must be careful not to go too far down the self-indulgent road of only pointing to the downsides of more central controls and not recognising why they might be necessary.

Self indulgent? Neither democracy nor justice are indulgences John. These proposed central controls represent an attempt to move economic and fiscal policy making away from popular democratic control and would represent a staggering capitulation to both political conservatism and technocratic elitism.

How can you justify that? Do you genuinely believe that the global financial crisis was caused by populism rather than an unaccountable financial elite and a misplaced trust in market solutions? What precisely do you think just happened? What makes you imagine that when Ireland has even less independence that our treatment will improve?

Again at the risk of giving offense, it is very easy for populists to take over this debate. I fear the dangers of the current course would too easily be forgotten.

I am not offended, very few people are disappointed and nobody is even slightly surprised. You would not have been chosen for the job of chair of the fiscal advisory council if you thought that the will of the people (distasteful populism) was more important than the requirements of the financial elite.

I look forward to the referendum and I hope that we might see more Labour party defections from the government before any attempt is made to enact a law making us only draft budgets agreeable to the CDU (“Fiscal Responsibility Bil”).

There will be no need for Sarkozy and Merkel to berate the next Taoiseach. Their minnows will simply send him a note.

A Chara

This is your budget. Income tax and Corporation tax will be as per the schedule on page 3. Social payments are listed on page 4.
There will be no change to the Ireland bank bond repayments on page 6.
Cabinet signatures are required on page 7.

Mit Freundlichen Grusen

I see Jurgen has his finger on the pulse vis what’s needed let’s screw the little people

http://www.businessweek.com/news/2011-12-01/ecb-s-stark-says-euro-area-must-cut-wages-to-help-exit-crisis.html

NS speech….My belief is that Sarko has been told if you make the right noises about so-called fiscal integration we will make sure the ECB does the right things to protect your triple A status and to stop your banks from going bust. Simple as. Independence my a55

Given that Europe is heading for a much worse recession than currently forecast and won’t be growing their way out of anything for the next couple of years, I sincerely hope that one of the ratings agencies has the gumption to see through the bs and downgrade France and I sure as hell hope that the next election is the last we see of Sarkozy but I doubt that as he will end probably up doing something in the EC

Do you genuinely believe that the global financial crisis was caused by populism rather than an unaccountable financial elite and a misplaced trust in market solutions? What precisely do you think just happened? What makes you imagine that when Ireland has even less independence that our treatment will improve?

There are many levels of blame in the real world and in 2009 Senator Dick Durbin of Illinois said Wall Street owns Congress – – just as railroad barons and other robbers did more than a century before.

Are the members of Congress and the US public victims of this system?

Recently Republicans on a House committee voted against increasing the budget of the SEC — in fact to strangle new enforcement measures – – even though it’s funded by Wall Street fees.

Remember ‘payback time’ in 1997 and the long public love affair with Bertie Ahern? Irish voters opted for the tooth fairy rather than prudence.

The Irish government could have done nothing to restrain an out-of-control-boom?

Who is responsible for the fact that France hasn’t had a budget surplus since 1974 — why wouldn’t the debt rise with that record of red ink?

Jean-Claude Trichet often referred to the the watering down of the stability and growth pact by Germany and France in 2004.

Yes the financial plutocracy were guilty of economic crimes but there was no political appetite to stop them.

As for independence, when up to 80% of Irish longterm public funding is provided by foreign private investors, they have the option of being at your throat or at your feet.

@ John McHale

I would be 100% in favour of the kind of oversight being sought by Germany and the ECB if I thought it would solve the problem, but of course as we are all too aware in Ireland and Spain, the crises has crisis has largely been caused by imbalances in Europe rather than feckless and lazy Southern Europeans that are unable to control their deficits at the best of times.

So if more oversight won’t solve the problem, the changes must be driven by a government policy/ belief that if we are good boys, then Germany will do the decent thing and bail us out. Given the Draghi point you highlighted above that ‘sequencing matters’, it appears we are supposed to handcuff ourselved first before we find out for sure whether Germany or the ECB (as financed by Germany) are going to bail us out.

What makes us think that Germany will deliver? What if they actually believe their rhetioric that oversight alone will solve the ‘crisis of confidence’ that they see. What if they get spooked when it doesn’t? As the parliaments of the AAA rated countries are gradually replaced by more eurosceptic members, do we really think it more likely there’ll be a bail out in a year say (once treaty changes have been passed) than today? We’ve seen through the performance of the Maastricht criteria that Germany and France are only content to stick to their financial obligations when they feel like it. Why would we expect them to now?

Recently the only Eurozone policy whispers from the Irish government I hear are policies of hope. First the policy was if we keep the banking guarantee, when Greece defaults, we’ll get a write down. Then is was if we keep to the program and keep our heads down the ECB will print a ‘wall of money’ to save us. Now it seems to be that if we sign up to some treaty changes, then Germany will bail us out afterwards. None of the previous hope-based policies have worked out for us, we’ve just ended up a little more austere and in a deeper hole. Why would we expect this to be better?

The governance of the Eurozone at the moment seems to me to be like a repeated Prisoner’s Dilemma game where the other players are intermittently defecting when the stakes are reasonably low (e.g. Greece on reforms, France on banks, Finland on collateral, Germany on everything) while Ireland continues to blindly cooperate on every turn – my worry is that there are some very big turns coming up with very big stakes and Ireland isn’t seriously debating both options in the same way that other players are.

@John McHale

I think we’re in broad agreement that any change that resulted in external control of specific tax and spend decisions, or tax/spend ratio, should be opposed, and that any such proposals should require a referendum before adoption (at least I’d regard that a ‘major change’ to how the EZ operates). For macroeconomic level controls I think there needs to be more of a distinction made between things the government can control (budget adjustments) and things the government cannot control (growth) and that there needs to be a feedback loop in the target setting where growth is an input to the amount of budget adjustments made, but that’s a whole other topic.

Back to the fiscal controls issue, I would point out that In the last year alone the enhanced EDP, the European Semester, the Euro Plus Pact, the Six-Pack, and the Ten Measures (Oct 26 Council conclusions) have all been introduced, so the starting point on which the latest initiative is based is already a pretty high degree of macroeconomic level control (including for example, automatic financial sanctions with reverse majority voting). Either what is being proposed now is just the addition of one or two more rules in addition to the dozens already there, or is a much more significant degree of intrusion. If the former then it certainly isn’t a game changer in terms of “market confidence”, and can hardly be expected to trigger big shifts in anyone’s current policies; if the latter then it raises the democratic legitimacy and approval process issues I brought up earlier. It can’t be both at the same time.

It is far from clear that the Irish government are on top of the entire decision making process. Enda Kenny seems to think that Von Rompuy will bring some proposals to the next summit, and they will then have a few months in which to deliberate and formulate a response. However it appears that Merkozy have different ideas, and will do at the next summit what they have done at the last half-dozen ones which is to prepare draft Summit Conclusions in advance, and then force them through at 2.00am on the last day with perhaps some minor word-smithing along the way. They are no longer thinking in terms of treaty change, but of EZ intergovernmental agreement, where the checks and balances of the treaty change process, such as they are, don’t apply. This is no way to make policy that impacts on sovereignty. Extreme caution is required.

I think that the threat of the collapse of the Euro is greatly exaggerated – as Noonan said on Rehn’s ’10 days to save the Euro’ position – “That’s drama, not reality”. All along the threat of impending doom has been used as a lever to force through decisions that favour the stronger actors. I don’t see any difference this time around.

@ John McHale and others

I’d missed Roubini in the FT, but I’m very surprised to find no-one quoting him here.

http://www.ft.com/intl/cms/s/0/459f80e0-19b8-11e1-ba5d-00144feabdc0.html#axzz1fMKcHgsr

What he prescribes, and quite frankly, I’m inclined to believe him above most, (and for obvious reasons), is a debt restructuring for Italy. He doesn’t believe anything else will work. Last minute or not.

His logic: if the ECB enters the secondary market and sets an interest rate target they’re going to have to buy up the entire outstanding stock of Italian debt. Investors will dump Italian bonds.

He sees the austerity requirements as turning a “recession into a depression.” He cites claims of a wealth tax, and says it would have to be up to 30% of GDP to make the debt sustainable.

Now, considering what Roubini describes, I’d add a couple of points: if the ECB steps into the market in only a limited manner, yields on “insolvent” peripheral debt will actually rise. Effectively, if it intervenes, it will claim ownership.

So there are two choices in this scenario: defaults, or direct funding of governments.

My questions so: if the scenario above is correct, do you envisage the ECB engaging in direct monetary financing? If not, how do you see it working? And are we discussing giving away our sovereignty (which frankly, I find abhorrent) for something that wouldn’t even work anyway?

@Edward v2.0

Good post. I’ve seen no evidence that Germany is prepared to mutualize the EZ debt any further (e.g. through more EFSF contributions, Eurobonds or recapping the ECB) and no evidence that the ECB will inflate away any of the debt. They are not talking about quid pro quos, but about trying to make the Euro work the way they think it should work, which prohibits debt mutualization, and which they think is the only way the Euro can survive. I think they believe their own rhetoric.

And I agree with the hope-based politics assessment. Enda Kenny this week:

I have set out on many occasions that the ECB is the port of call of infinite firewall capability to prevent all that contagion. Some countries oppose that for strong reasons. In my view, the answer to this problem has to lie with the support of the ECB in whatever form, be it through the EFSF, IMF or some facility in that regard but it has got to be dealt with quickly.

Or in other words it is the “wall of money” theme – “The ECB will save us, in some way, through some intermediary, and they will do it quickly”.

@disgruntled observer

I think managed defaults are an integral part of the German vision of how the Euro should work. They said as much in the leaked foreign ministry paper (not financial ministry paper as I previously said). While the views in that paper may not be exactly the same as those of Schauble and Merkel, I doubt they are too far off.

The ESM must also be capable of executing an orderly default of a eurozone member state.

Sarkozy doesn’t agree, and got his retaliation in first in his Toulon speech. Don’t know how they are going to square that particular circle.

@Bryan G

“They are not talking about quid pro quos, but about trying to make the Euro work the way they think it should work”

Sadly, that is also my reading of it and I don’t see the other players (governments) doing anything but what they are told to do and blindly walking into a right mess. I remain highly sceptical of Merkozy’s approach and believe what an earlier post implies, that they will have drafted the conclusions of the next summit before it starts.

I’ve had a lot of contact with politicians over the past few years (though it’s not my field of expertise, they just seem to meddle a lot in areas I am in) and I have grown to understand that you won’t be too disappointed if you start from the basis that everything they say to you is a complete pack of lies, the only thing they are interested in is their own agenda and interests and they would stiff you immediately if it suited them.

The guy with the best handle on the situation at the moment seems to be Merv the Swerv King.

@Karl Whelan (if you are out there)

Would you start a new thread to expand on some of the things you have been saying over the past couple of days – what so-called fiscal union is or isn’t v how it’s currently being presented by politicians?
Thanks.

@ All

FYI

http://www.irishtimes.com/newspaper/world/2011/1202/1224308475202.html

It is notable that “semi-peripheral” bond spreads are narrowing dramatically. The announcement of new budgeary measures by Italy, Monday, will accentuate that trend. In other words, the contagion risk is being reduced but Ireland, of course, is still in the contagion ward.

Merkel, logic would say, faces a bit of a dilemma in agreeing a position with Sarkozy on Monday. She cannot give away her negotiating hand in advance. The attitude of the UK will also be of enormous interest. A move on the excessived deficit procedure would require its agreement.

@ Bryan G

I missed that element in Sarkozy’s speech. The circle could be squared, of course, by going back to the version of the ESM treaty text that all EZ countries but Germany want.

RE:

It is notable that “semi-peripheral” bond spreads are narrowing dramatically. The announcement of new budgeary measures by Italy, Monday, will accentuate that trend. In other words, the contagion risk is being reduced but Ireland, of course, is still in the contagion ward.

I think you are reading this in the wrong way. Bond spreads are narrowing because there is growing confidence that a solution is imminent that will end the contagion effect.

However, that solution may not be the one you hope for:

I’m not going to use any mathematical laws of probability on this, but this could be done, there is currently very high risk, if not high probability of the following:

Following Sarkozy Toulon speech, given the lengthy negotiations that will be required to redesign European Treaties, we could be expelled from the EMU with a new hardening of the rules to be imposed on member states. Those rules may by majority make it impossible for peripherals to remain within the EMU.

There may already be a new core Treaty ready for signature by Germany and France initiating a core EMU with Germany leading a number of core countries out of the old and into the new.

This would also mean changes to the current Treaty on the the terms under which this tier 2 group, those remaining on some second level EMU status, could continue to retain membership of tier 2.

Less likely imho the EMU and ECB will be disbanded and the flag of a new redesigned EMU ready for application by intending members made ready for some future point.

High probability exists for any of these scenarios:

One thing for sure, the EMU as we know it is finished: der Euro ist fertig

@The Dork

Financial System using Gaullist procedures and power structures to protect itself and socialize its losses. Perfectly logical, from Financial System perspective, to direct the most centralised levers of power.

@all

Anyone find a link to transcript of Merkel speech this morning?

@seafoid
Good to see Lucinda getting to grips with substantive issues …. anyone think of HRH overstamped on the Harp – to balance my collection of Harp overstamped on HRH; still have plenty of red paint leftover – we might need it!

@David O’Donnell

There are only partial translations around at the moment (the odd paragraph). I will let you know if I spot one.

@all

The eurozone financial situation continues to worsen. The latest idea from the eurogroup of finance ministers is apparently to have the European Central Bank make a massive loan to the International Monetary Fund, which would then turn around and lend to countries like Italy. This is a bizarre notion. If the IMF takes the credit risk of a mega-loan to Italy – e.g., an amount around the $600 billion mark, greater than the fund’s current lending capacity – this would represent an unprecedented and unacceptable risk to the IMF’s shareholders, including U.S. taxpayers. If the IMF does not take this credit risk, what’s the point? The ECB should provide financial support directly to Italy, if that is the goal.

http://baselinescenario.com/2011/12/01/the-huntsman-alternative/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29

contd.
But that goal increasingly seems both to be the only idea of officials and the last failed notion of a fading era. More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs. Yet this is also the main idea of the Obama administration. Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts. And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around. (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)

@edward 2.0

Given the Draghi point you highlighted above that ’sequencing matters’, it appears we are supposed to handcuff ourselved first before we find out for sure whether Germany or the ECB (as financed by Germany) are going to bail us out.

What makes us think that Germany will deliver?

+1 – A nice summary of the appeal to their better nature after submitting completely “strategy”. Worth reading twice to enjoy the ironies.

@Michael Hennigan

Yes the financial plutocracy were guilty of economic crimes but there was no political appetite to stop them.

It is one thing to correctly identify that the citizenry were easy marks for the neoliberal con but quite another to let the con artists away with their winnings.

@PR Guy on Jurgen Stark’s plea for wage deflation for the median worker

I see Jurgen has his finger on the pulse vis what’s needed let’s screw the little people

Jurgen needs to keep the European financial oligarchy happy, for which he needs to support the Euro’s value, for which he needs to preserve the financial sector, for which he needs to reallocate money from the bottom to the top of the social pile.

It is not like the monetarists, market liberals and fiscal hawks (Goldman Sach’s Issing would be another example) have ever dissembled about their politics. “The business of Europe is central European corporatism” does not quite have the ring of Coolidge’s original but then again Coolidge went on to say “The chief ideal of the American people is idealism.”, somthing the architects of the Eurozone would sneer at as mere “populism”.

On the other hand …

Draghi was Goldman Sachs International’s vice-chairman for Europe between 2002 and 2005, a position that put him in charge of the the “companies and sovereign” department, which shortly before his arrival, helped Greece to disguise the real nature of its books with a swap on its sovereign debt.

Monti was an international adviser to Goldman Sachs from 2005 until his nomination to lead the Italian government. According to the bank, his mission was to provide advice “on European business and major public policy initiatives worldwide”. As such, he was a “door opener” with a brief to defend Goldman’s interest in the corridors of power in Europe.

The third man, Lucas Papademos, was the governor of the Greek central bank from 1994 to 2002. In this capacity, he played a role that has yet to be elucidated in the operation to mask debt on his country’s books, perpetrated with assistance from Goldman Sachs. And perhaps more importantly, the current chairman of Greece’s Public Debt Management Agency, Petros Christodoulos, also worked as a trader for the bank in London.

Two other heavyweight members of Goldman’s European network have also figured large in the euro crisis: Otmar Issing, a former member of the Bundesbank board of directors and a one-time chief economist of the European Central Bank, and Ireland’s Peter Sutherland, an administrator for Goldman Sachs International, who played a behind the scenes role in the Irish bailout.

http://www.presseurop.eu/en/content/article/1177241-our-friends-goldman-sachs

Just taking a quick look at the FT:

ECB overnight lending jumps to 8bn

Spanish unemployment continues to rise

Europe prepares Iran oil embargo (which is bad news for Greece btw)

Urgent IMF deal needed for Budapest

US hedge funds threaten action of BOI bonds

End of gilts rally feared as growth ebbs

US offerings slump below list price

Emerging markets equities tumble

So I thought I would turn to the Telegraph for some light relief:

Merkel refuses to budge on ECB role and that crisis will take years to resolve

BOE thinks lenders will need more taxpayer cash#

European banks are 91bn under-capitalised

China tells Europe: you are on your own

Chief executives of Shell, Philips, Unilever, DSM and AkzoNobel tell Europe it is one minute to midnight (in a letter to Dutch paper)

Happy Friday…

William Hill is running books on the fate of the eurozone. They have odds of 3/1 that it will all be over by the end of next year, and 6/5 that Greece will drop out by the end of 2012. Seriously.

@seafoid

Who’s he proppin for? Sure ain’t the serfs in occupied paddyland. Might be time to send for John Hayes and Clohessy and then present Precious Peter S. with the ball – these things are understood around Thomond Park …

Der Spiegel on Dr Merkel speech today

‘No Immediate Solution’
Merkel Pledges New Fiscal Unity for Europe

Patience. That is the primary message that Chancellor Angela Merkel sought to deliver to the German parliament in a keynote speech on Friday in preparation for next week’s European Union summit in Brussels. When it comes to the euro crisis, she said, “there is no immediate solution, there are no quick and easy answers.” The chancellor added that “resolving the sovereign debt crisis is a process and this process will take years.”

http://www.spiegel.de/international/europe/0,1518,801338,00.html#ref=nlint

Patience! from Dr. Merkel. Decisiveness! from ECB. Discipline! from Nikki.

EURO_JIMA

@DOCM

Thanks for the Sarkozy speech. A most statesmanlike presentation, we will wait along time before we see anything like it out of Dublin. In a world dominated by giants the little nations of Europe are best represented by the EU. Sarkozy addresses this when he says “Europe requires more solidarity, but more solidarity requires more discipline.” and “Europe needs more political responsibility.”.

In Ireland we think we need more handouts a total negation of discipline and responsibility.

@ All

The article by the Paris correspondent of the IT in today’s edition supports my analysis of what Sarkozy is up to.

http://www.irishtimes.com/newspaper/opinion/2011/1203/1224308521815.html

Peter Oborne of the Telegraph also has an interesting take on the situation, notably in relation to the involvement of Obama and the pressures this creates for Cameron. Geithner is, I understand, meeting European leaders next week.

http://www.telegraph.co.uk/news/worldnews/europe/eu/8931546/The-eurozone-crisis-we-need-more-than-prayers-now.html

@ All

I repeat here a post I made on what I would describe as the Pavlovian reaction – sorry, referendum – thread which is representative of a political, media and commentariat mindset that nothing can be done about, as far as I can see.

@ All

On the subject of treaties et al, the following extract from the speech by Sarkozy to which Grumpy drew attention is worth quoting in full.

“Il doit être absolument clair que tous les pays de la zone euro seront solidaires les uns des autres. Il doit être clair que ce qui a été fait pour la Grèce, dans un contexte très particulier, ne se reproduira plus, qu’aucun État de la zone euro désormais ne sera mis en défaut. Il doit être absolument clair qu’à l’avenir aucun épargnant ne perdra un centime sur le remboursement d’un prêt accordé à un pays de la zone euro. C’est une question de confiance et la confiance conditionne tout”.

“It should be absolutely clear that all the countries of the euro will show mutual solidarity. It should be clear that what has been done for Greece, in a very particular context, will not be repeated, that no other state of the euro zone will be placed in default. It should be absolutely clear that in the future no saver will lose a centime of the repayment of a loan accorded to a country of the euro zone. It is a question of confidence and confidence shapes everything”.

No ambiguity there! But how does it rhyme with the text of the ESM as signed?

The other avenue of possible interest is Article 126.14 TFEU.

There will, of course, alos be treaty changes but these, as Merkel has clearly intimated, will be limited, the most importnat change being the deletion of the restiction in realtion to the ECJ.

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