Fiscal Union in the 1990s…

A Suicide pact -Save yourself Run to the $$$$$$$$ hills.

I think ‘verified by the ECJ’ means that the rules in each country’s constitution will be checked by the ECJ to make sure they meet what is expected, rather than each individual breach will be adjudicated by the ECJ.

Don’t they get it ?
In the 90s we exported our capital so that China could finance 2 coal fired powered stations a week.
In return we received credit to buy goods off the Asian slaves……… that world is over.
Money must now be produced either in private (Gold) or Goverment form (sov debt) now.
You can’t hope to stop this train – it was the biggest industrialisation in human history both in scale and speed , dwarfing the european 19th century experience.
I still am not quite sure if they are mad , stupid or corrupt – probally all 3 I guess.

They really, really mean it this time.

This time its different.

Clearly, if a country enacts a law banning a deficit above 3%, such a deficit will never occur. In this way, states that already have an unsustainable debt load can simply legislate themselves into debt sustainability – obviously, without any possibility of sovereign bondholders having their bonds restructured.

Why didn’t anyone think of this before?…….

Actually, the only way this adds up is if Mario and Angela need a face-saving gesture before ECB buying beyond what can be sterilized.

Looks like yet another kick to touch, unless the ECB are looking for said cover.

I based my above comment on this, from the FT

“Ms Merkel has watered down her demand that the European Court of Justice adjudicate on breaches of fiscal rules. Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits. These rules will be harmonised under a new treaty. The ECJ will merely rule as to whether each eurozone country’s “golden rule” complies with the new treaty.”

but this quote of N. Sarkozy, also from the FT

“The court can certainly help verify that countries are respecting their balanced budget rules.”

contradicts it, so I might have been wrong above.

It really is a very stupid idea.

Sadly, as tax revenue decrease the interest due on the national debt will rise to €7.5bn in 2012 in Ireland almost 20% of tax revenues.

Fair enough and good luck on anti keynessian Merkozian 3% budget deficits, but where’s the debt relief for Ireland coming from?

The first thing that will happen is the emergence of extra constitutional ‘special investment vehicles’ used to finance current spending.

@ Tim
Unfortunately I’d guess that they listen to their political advisers rather than the economic ones – Merkozy only cares about getting elected next year, anything beyond that timeline is irrelevant for today’s debate.

Above from FT

@Grumpy
Why didn’t anyone think of this before?

Because, as Kevin O’Rourke says, It’s so stupid.

@DOCM
“This sends a clear and unequivocal message to the markets. The two mainstays of the euro, Germany and France, are not about to drop the ball.

All the rest of the hullabaloo, while not lacking in importance, is secondary.”
I would go further and say that the credibility of the ESM is at stake…it will now be loaded up with States with unsustainable debt…guaranteed by downgraded core countries all heading into a recession.
And then there is the little matter of what appears to be an attempt to circumvent the German constitutional court with unsterilised bond purchases as referred to by Grumpy above.

Colm/Kevin,
Points taken. However is this draft treaty enough to persuade the ECB to do its thing.. . Whatever that is. Cos if it ain’t spreads are going wider & all sovereign yields are going north.

@ Colm McCarthy

They are not being removed. They will remain but in conformity with normal IMF and international sovereign bond arrangements. Deauville did not help but what destroyed bond markets across Europe was the entanglement of sovereigns and banks in a sea of debt.

@Colm B
Who cares about the S&P – the $ brushed a downgrade aside as if it were a nothing.
What matters is if you are prepared to replace credit as it gets paid off or are you not.
Clearly now the Euro area is goosed – with not enough euros available to pay off the M1 debt never mind the M3.
I am getting comfortable with the Dollars $15 trillion base , not so much with the euros 420 billion euro base – its liable to topple me thinks given the weight of credit above it.

@DOCM
Nah boy I am exchanging my 50+ spot tommorow for some $70 – these amateurs do not know how to run a empire.
The Gruel & Spuds economy is just as unsustainable as the credit economy – the fireworks will be impressive though.
Glad to know our dear leaders are transferring our consumption to elsewhere on the planet – they are Good Little Christians me thinks.

The real doozy is to wonder what would have happened if the (new, improved) debt brake had been in place in 2007. There are basically four options:

* Our bank bailout would be toast

* The debt brake would be toast

* The debt brake would conveniently turn out not to prevent governments from bailing out banks, after all. But of course, debt run up for the noble purpose of bailing out bondholders is still debt

* In this hypothetical alternative 2007-now, there would be not only be a (new, improved) debt brake but also centralised European bank regulation with a centralised bank bailout fund. Of course the EU bank regulator would have prevented Ireland’s housing/credit bubble from swelling up in the first place. Only kidding! Even LBS was kind enough to admit that this is a tall story. So what we would have is a fat great fiscal transfer via the bailout fund. I sure wonder if there would turn out be enough money in the bank-bailout pot after all. What would happen if there wasn’t?

@DOCM
Just a bit of balance from the Anglo Saxon press to counteract the lack of real analysis from others…
“15.44 Here’s the verdict of our International Business Editor, Ambrose Evans-Pritchard, on today’s Merkozy (non)-event:
Zilch again from Merkozy. No fiscal union, no Eurobonds, no ECB as lender of last resort – yet. Just the usual blather and a revamped Stability Pact (Fiskalunion). Yawn.
Merkel seems to have backed off on demands that budget breaches will be justiciable before the European Court. Given this shift by Berlin, the Treaty chatter is mostly Quatsch, bêtises, and eyewash.
This Merkel climb-down makes it less likely that she will give in on real rescue measures, so why the market exuberance in Italy? Beats me.
Private investors will not have to face further haircuts after Greece (If you really believe anything they say) but that was already the case. Nothing further to add at this stage.”

On Italy

ROME – Italy’s IRPEF income tax stays unchanged, even for top earners. But wealthy Italians will face at least €12 billion in new taxes. The “Save Italy” decree, as the prime minister, Mario Monti, has called it, will extract a total of €18 million from Italian pockets to make the public accounts add up, balance the budget and promote growth with measures to kick-start the economy. The total impact of the budget is €30 billion, with €12-13 billion in cuts to public-sector spending involving welfare, regional, provincial and municipal authorities, and €17-18 billion in new taxes. Two thirds of the new levies will be on real property, in other words homes, and financial wealth, including sums repatriated under the “tax shield”, as well as luxury cars, boats and private planes. Twenty billion euros of the €30 billion (€20 billion net) generated will go to reducing the public deficit and €10 billion will finance measures to stimulate economic growth, such as removing the IRAP regional business tax on the cost of labour and introducing tax incentives for company capitalisation.

http://www.corriere.it/International/english/articoli/2011/12/05/tax-on-first-homes-and-pension.shtml

All through “Emergency Decree” – The Tentacles have Landed.

@cet. par.

It seems we’ve actually been moved to Stable from Watch Negative.

“It seems we’ve actually been moved to Stable from Watch Negative.”

Looking for somewhere to stand and stay
I leaned on the wall and the wall leaned away

At this stage, the last hope of a solution from within Europe is well and truly bust

The theory that Merkel’s dithering was in fact a giant game of chicken to get more political advantage…is out the window as her plan still doesn’t address reality

What is required now is for IMF+BRICS+US to take a co-ordinated stance…that stance shouldn’t seek to tell Europe exactly what to do, rather instead layout some _viable_ options , along with a ‘nuclear option’ that IMF+BRICS+US can take unilaterally

The assumption that Ireland can sit idly by on the sidelines whilst all of this happens…is the same type of ‘head in sand’ cowardice that got us into our own domestic mess

My God the ratings agencies are basking in the limelight of their new found relevance after doing F”ck All for the last 20 years but skim off the top.

Given that Merkel’s own parliamentary finance spokesperson said this yesterday

“We need to give markets very clear information on pricing in risks when buying new euro region sovereign bonds,” Meister said. “That’s where collective action clauses come in and with them clear procedure for investors in case a sovereign state should face insolvency. This should not be changed, that is our position.”

she’s gonna have some splainin’ to do at her next party meeting…

@Bryan G

While Greece may be the only “Level 2″ country right now, it would not take too many more quarterly reviews that begin with (as the last Greek one did) with “The contraction in economic activity is substantially deeper than previously projected….” to start hitting that territory.

In fact, for several countries the reports only have to begin “Growth in economic activity is substantially weaker than previously projected” to drop that country into Level 2 territory, yes?

So the PSI provisions will be removed, and replaced with new ones aligned with IMF practice, which are essentially the same as those being removed.

And even if all PSI provisions were/are removed, that wouldn’t mean that no PSI will happen. There are three possible states: the EU commits to bail out clearly insolvent states (future Greeces) with fiscal transfers and/or ECB monetisation; the EU commits to leaving future Greeces to undergo PSI; or the EU’s new position is incoherent. Those three options are (basically) exhaustive but not exclusive. The argument seems to be that if the EU resiles from its plans to let future Greeces undergo PSI, then by default it’s committing itself to bail them out instead. But that’s not necessarily so: the EU could simply be returning to an incoherent position. Of course, from that incoherent position it might end up bailing out all future Greeces when push comes to shove. But equally it could let them go under. It’s too much to interpret the EU shying away from one unpalatable alternative as a new commitment to grasp the nettle of the other unpalatable alternative – it could well be a retreat from all unpalatable choices back into denial.

@ Bryan G

All very interesting: but catch zome zzzzs!

Guardian (and RTE and other sources) reporting a bit blurrily:

“While the overall package was largely scripted in Berlin, Merkel delivered one major concession, abjuring losses for private investors in sovereign debt crises. Under pressure from France, the ECB and the European commission, she agreed private investors in eurozone debt would not be forced to accept losses in the event of a default or bailout, with the exception of Greece where “haircuts” for the banks and private investors were agreed last July.”

But this may be giving the info a particulat slant.

What I think has happened is that the very explicit PSI (ugh) language has been taken out (which is being reported as PSI gone), but rather than that mean explicitly “No PSI”, it means (as you and DOCM are suggesting elsewhere), PSI dealt with according to international norms – ie in line with IMF.

For what it’s worth, I reckon that rigid language on the lines of “there can never be” when “there can never be” cannot be supported in the real world is a key part of the mess.

@ Bryan G, etc

Financial Times reporting today:

“France and Germany agree new rules”

“The proposals, which include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs, were announced by Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, in Paris on Monday.”

With the ambiguity on “not to force”.

Reuters thinks it’s nuts if they really mean it:

“The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

“Right now, the commitment is still vague:

“”Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.”

“Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.

“You can safely ignore the bit about collective action clauses. They’re part of the sovereign-debt architecture now, and taking them out would be far more trouble than it was worth: they have to stay in, no matter what. The important thing is that they won’t be used — because if no one’s going to ask bondholders to bear any losses, then they won’t have any proposals to agree to.

“The impetus for this completely insane policy seems to have come from the ECB, which genuinely seems to believe that bailing in private-sector banks, in the Greece restructuring, was the “terrible mistake” which caused the current euro crisis. Talk about confusing cause and effect: it was Greece’s fiscal disaster which caused the restructuring and the necessary bail-in.”

http://blogs.reuters.com/felix-salmon/2011/12/06/the-eurozone%E2%80%99s-terrible-mistake/

http://www.ft.com/intl/cms/s/0/d0d39098-1f53-11e1-90aa-00144feabdc0.html?ftcamp=rss#axzz1fjiKcl8o

@ Bryan G

Maybe this extract from the FT report will illumintae the issue.

“In an apparent concession, Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.

Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.

The economists may be able to come with perfect solutions to the EMU’s monetary policy trilemma – and sneer at the politicians’ feeble attempts, but, as Kevin O’Rourke has pointed out, the politicians are struggling to manoeuvre within Rodrik’s political trilemma – without bumping against the hard boundaries. So it will be a firm enforcement of ‘creditor’ nation style ‘good economic governance’ across the EZ – and beyond on a voluntary basis, enforcement of structural reforms on the laggards who have varying degrees of internal dysfunction and ‘extend and pretend’ on the banks until both Sarkozy and Merkel are re-elected. All this may help to strengthen Mr. Draghi’s hand.

It is hoped that this will be enough to satisfy the sovereign bond market participants – or at least those participants who have an interest in being satisfied. S&P obviously isn’t ‘on message’.

The banks are like Samson chained to the pillars of the Philistines’ temple. Governments and banks were willing co-conspirators in costructing this temple to avarice. But the temple also provides essential services. Structural reform is required across the board, as recommended by the UK Independent Banking Commission (and accepted by the UK Government), to separate or ‘ringfence’ banks wholesale and retail activities.

This will take time. Bind market participants are impatient, but do they really want Samson to pull the temple down?

@ All

As we are all into treaties at this stage, Brigid Laffan’s piece in today’s IT is worth a link.

http://www.irishtimes.com/newspaper/opinion/2011/1206/1224308618936.html

She alerts us to one other option; that of using an “enhanced cooperation” procedure (Article 20 TEU etc.). This, of course, cannot be used to amend the treaties and, for that reason, would presumably not meet the demands of Germany. However, Merkel’s approach is being lambasted by the SPD in Germany and the negotiations are, as yet, far from over. The option of using Article 126.14 TFEU – allowing changes by the Council itself to the excessive deficit procedure – also cannot be overlooked.

Re: S&P downgrade risk… gee, who could have seen that one coming?

The old phrase was
“Remember Limerick and the Treaty”
Maybe we should change it to

“Remember the ECB and the bank bondholders”

I wonder how many times do we need to be turned over before we say no.
After being burned by the ECB/Merkozy on the bank debts, it is bit like asking the American Indians to sign a new treaty and trust in the goodness of white man.

“This war was brought upon us by the children of the Great Father who came to take our land from us without price.”

–Spotted Tail, “The report and journal of proceedings of the
commission appointed to obtain certain concessions
from the Sioux Indians,” December 26, 1876

Huh ? This article has me confused:

http://www.voxeu.org/index.php?q=node/7391

Is this say ELA isn’t printed money ? and is effectively sterilized by making out Bundesbank monies as its source ?

From the Irish Times artickle liinked by DOCM.

“The Irish Government should ask the newly created Fiscal Advisory Council to examine what options might suit Ireland.”

@Paul Hunt
It is not glee, it is despair at the clowns.

@ Michael Hennigan
“Just a reminder: it was Ireland who made bank debt sovereign”

I’d like to see a log of all the calls to BLTD RIP on the day in question.

@Joseph Ryan: “it is bit like asking the American Indians to sign a new treaty and trust in the goodness of white man.”

The thing is though, the Indians usually signed. And those who didn’t fared no better. I don’t think that the periphery has the stomach for a fight with the core. Get used to the Trail of Tears, we’ll be on it for quite a while.

@Seafoid

Trichet did tell all Finance ministers “at all costs save your banks”

However how much more the ECB said is still very much unknown and perhaps that was enough.

One thing makes me think domestic pressure from the banks had more to do with the sovereign guarantee it than the ECB.

Brian Lenihan had no problem fingering the ECB after the bailout.
He said they forced us into it.
http://www.rte.ie/news/2011/0424/economy.html

He didnt blame Europe after the bank guarantee.
In fact Christine Lagarde claimed she was shocked at the action taken.

“@Desmond Brennan,

Re “s this say ELA isn’t printed money ? ”

Next, the Bundesbank could sell its gold (currently €132 billion) or its
international reserves (of €49.5 billion). However, it has fiercely refused to do
so in a heated debate with other Eurozone members last October. Instead of drawing down its holdings of gold, the Bundesbank became a net debtor in the private domestic capital market, as shown in Figure 3.

Essentially ELA had to be backed up with assets from somewhere. This is a tipping point. There is no more credit and the ELA’s TARGET payments are black holes making the current situation worse. Its hard not to see how the current bailout to Ireland could not have had a more benign approach to give us some chance of recovery. However, at the time it was probably more politically correct for Germany’s electorate to see Ireland burning on the spit. Germany is burning now. In Ireland’s case debt forgiveness to allow some hope of recovery should have been built around ELA promissory note repayments, it wasn’t. European leaders such as Sarkozy in not factoring in some form of default as part of the solution have misled the EMU. As the edifice of the euro collapses and default becomes inevitable, this will happen anyway.

As a side note, as I understand it, recent intervention by the Global Central banks to support forex swaps to ECB central banks, if the euro is devalued through printing of money, though this is prohibited under the ECB’s operational mandate, would mean a devaluation of the euro, this would trigger massive losses by the euro against those dollar swaps negating any perceived benefit re printing money.

Best now for individual EMU countries who require this to just wind up their membership of EMU and go for a structured Chapter 11 to clear up the mess instead of painfully making the mess worse. Hopefully they can retain membership of the EU and form some sort of a tier 11 Commonwealth to promote trade with a tier 1 EMU if this develops; alternatively, some form of a commonwealth trade pact for all that will be the precursor to a new enhanced EMU should a proper Stability and Growth plan emerge for a new euro in the future.

@Paul Hunt
Sardonic, yes.

Gleeful, no.

Yes, they are clowns. Look what happened to our own clowns once the populance copped on to what they had done. Infamy? There isn’t enough of it to go round. Contrast that with Whittaker, Churchill, Adenaur, basically anyone who really did make hard decisions. Legacy goes in a flash.

@ Michael Hennigan

So the Irish government sold the country down the Shannon on the bank guarantee night. Yes they did.

The bank guarantee has come up several times since then. The Irish governments, however meekly, have sought to get ‘permission’ from the ECB/ Troika to reverse at least some of the damage.

It has steadfastly been refused on every occasion accompanied by essays in moral hazard from the now depart Bini-Smiaghi and the soon to be departed Jeurgen Stark. And accompanied with threats (LBS) of effectively imploding the Irish banking system by refusing to accept the collateral because it lacked quality. Last week ( to my knowledge) the ECB changed its collateral rules so that bank toilet paper now has a good chance of passing the test.

The new treaty we are told is a Hy-Brazil land where countries never go bust and banks never go bust because countries that never go bust will forever support the banks that never go bust. And the whole shooting gallery is suported by people who are well and truly bust.

Do you honestly expect me as an adult to endorse such delusion.
Europe has no hope when delusion passes for rationality or common sense.

Actually, another option not being considered above, a technical government appointed by ECB, led by Professor Honahan 🙁

@ All

The Telegraph is getting worried.

http://www.telegraph.co.uk/comment/telegraph-view/8935835/Where-do-you-stand-on-Europe-Prime-Minister.html

Perhaps the most interesting comment from the Van Rompuy paper (all of which has been trailed in one form or another previously) is the following;

“But Van Rompuy argues that “the current situation calls for immediate action. Beyond stabilisation tools, some structural steps for deepening the economic union can be implemented rapidly.””

He is, of course, correct. A medium-term and uncertain negotiation of treaty changes, whether at 27, or in separate negotiations by 17, simply will not cut the mustard. One element is certainly the speeded-up adoption of the amended ESM treaty, which requires a preliminary treaty change but which can be rapidly adopted under the simplified revision procedure. But he must have other elements in mind.

One wonders what officials in Berlin in Paris will make of the totally confused mish-mash of proposals outlined by Merkozy at their press conference in the paper which is to be submitted to Van Rompuy tomorrow.

The broader political issue is clear-cut. It would be an historic set-back for Europe if a two-speed version of it is allowed to develop. Unfortunately, as Iain Martin points out elsewhere in the Telegraph, Cameron is no Churchill and neither is Merkel or Sarkozy.

@anonym

In fact, for several countries the reports only have to begin “Growth in economic activity is substantially weaker than previously projected” to drop that country into Level 2 territory, yes?

Yes that’s what I meant. There was an article recently that predicted it won’t be long until Italy hits the 150% debt/GDP ratio with expected low rates of growth. Debt/GDP ratios go up very quickly and come down very slowly (e.g. I think Belgium ran a surplus for nearly two decades and never got anywhere near the 60% target).

@Gavin K

It’s not that Merkel’s U-turn has left me so angry and disappointed that I cannot sleep, but the more prosaic explanation of an 8-hour time-zone difference!

Salmon makes the point I made yesterday that it’s the Irish bank guarantee all over again (or would be if they meant it which they don’t). Fits with the definition of insanity about doing the same thing over and over and expecting a different result.

@DOCM

So bond-holders won’t be asked to bear losses, but will be forced to volunteer to do so. With a bit of practice I think I’ll be able to master this Euro-speak…

@ Bryan G

With respect, you are seeing complications where none exist. This row about PSI has been going on for the best part of a year and finance ministers of the 17 must collectively be feeling rather sheepish that they signed the version insisted upon by Germany in July.

cf. draft version of ESM treaty leaked in March and the choice between recitals 9 and 10 and Article 12.2 and 12.3. The correct one is now, belatedly, being made.

http://www.openeurope.org.uk/docs/draftesmtreaty.pdf

@Colm Brazel
Karl has addressed the issue I raised since:
http://www.irisheconomy.ie/index.php/2011/12/06/worse-than-sinn/

@DOCM

The difference between the two drafts boils down to the use of “shall” versus “may” as regards the ‘Level 1’ and ‘Level 2’ provisions which both contain (and both are subject to undefined debt sustainability analysis criteria). Germany has explicit veto power over all ESM disbursements, and so in the future can, if it wants, refuse to approve a programme, or a tranche, unless there is PSI, as it and the IMF recently did for Greece.

I expect the new ESM treaty wording to revert to “may” language instead of “shall” language, but in practice nothing will have changed. In fact you could argue that Germany already broke the ESM treaty by agreeing back in July to “no more PSI beyond Greece”.

Sarkozy is trying to give the impression that the language will mean “shall not”, but nobody believes that, since that is incompatible with every German statement on the concept of debt mutualization. So, new wording or old, it is, in practice, as you were. Nothing is ruled in, or out.

That link should be http://www.lefigaro.fr/assets/pdf/rapport-van-rompuy.pdf

@ Bryan G

The difference between the two drafts, apart from major differences in language, is that one is in the recitals or preamble to the treaty and the other is in its main operational article. If you cannot see the difference, the markets certainly can.

The possibility of using the procedure in Article 126.14 was signalled in the Handelsblatt all of two weeks ago so one must assume that it does not come as a surprise to Berlin.

The key consideration is that any changes would also bind the UK but Van Rompuy has very cleverly implied that a more rigorous form of discipline can be instigated for the countries of the EZ. In any case, is not the Conservative party’s main policy plank that of getting control of the UK budget?

There remains one difficulty, however, in that Article 126.10 excludes a role for the ECJ and the German negotiating paper (or, at least the one that emerged from the FDP led foreign ministry), as far as I can recall, demanded its deletion. However, the changes to the protocol on the excessive deficit procedure under a “special legislative procedure” that can be implemented under Article 126.14 would involve the adoption of “the appropriate provisions which shall then replace the said Protocol” .

The ECJ, by definition, has the right to review legislative measures.

This is not a question, however, of law but of politics. Both Merkel and Sarkozy lost the run of themselves months ago and both are now out on limbs from which it will be difficult to be seen to retreat, especially for Merkel in respect of treaty change.

@DOCM,

Agree. It is politics more than law, but the EU remains governed by laws. However, Chancellor Merkel needs a treaty change to convince enough of her voters that the dysfunctional PIIGS will, finally, be brought to heel. It is a high risk strategy, but anything less might not convince her voters that the PIIGS won’t duck and dive as they’ve done up to now. Solidarity now has a price in terms of responsible economic governance. (It is unfortunate that Ireland, by virtue of political stupidity and native greed, is already paying an excessive price for bank resolution.) The irony is that responsible economic governance is unambiguously in the best interests of the PIIGS, but they won’t develop and apply it for themselves – and they’re damned if they’ll take instruction from others.

Referendums in some or many member-states would concentrate minds wonderfully. There would be only one bite at this cherry. And it would reveal the naked selfishness of the Brits in its dealing with the EU.

@DOCM,

Your first point is valid, but one should not underestimate the willingness of many people to accept a measure of external governance when what is produced locally is so abysmal – once the optical illusion of national sovereignty is retained (and saluted by those exercising the external governance). I’m sure you’ve encountered this in Ireland. I certainly have and I’ve also encountered it during time spent in the rest of the PIIGS.

And, while I agree that the ‘great powers’ are congenitally myopic and arrogant, I sense a desire to secure the consent of a plurality of their voters. The Growth and Stability Pact was developed and applied under the Community method and it failed to ensure the sensible economic governance that it was intended to enforce. The fact that the ‘great powers’ were serial delinquents and that many of the PIIGS met the criteria is neither here nor there. The economic governance of the former was demonstrably superior to that of the latter.

And the fact that the ‘great powers’ – and their peers – either explicitly or by default sanctioned the lunacy of their banks and financial sectors is something they do not wish to address. They are confident it can be resolved over time, if they restrict the extent to which the PIIGS highlight the costly implications of this policy and regulatory folly.

The focus is on sensible economic governance in the PIIGS and they’ve got compliant governments in place now. The question now is if they can convince their voters that a revised Community method will enforce sensible economic governance on the PIIGS or is something of a more inter-governmental nature required. Many voters in these countries will be prepared to offer some measure of solidarity if they are convinced that the PIIGS have truly repented – and that the stick is big enough to ensure they continue on the path of rectitude. They have been lied to far too often.

@DOCM,

Thank you. I stand corrected. It was simply a ‘pact’ to which, as Juergen Stark highlighted in his recent speech in Dublin, governments put thier soveriegn signatures – with those in the PIIGS laughing up their sleeves as they contemplated ways they could be seen to comply with it and do what they liked.

I remain convinced though, that Chancellor Merkel is looking for a stick big enough that will convince her voters that it will keep the PIIGS in line – not forgetting that many Dutch, Finnish and Austrian – as well a Danish and Swedish – voters might want an even bigger stick. How much she will concede to Pres, Sarkozy to allow him to strut as he campaigns among his voters is a key question. I suspect she would prefer that he were re-elected. And the horrible thought occurs to me that she may hold her ground on the Community method – she has and wishes to retain the wary support of her other neighbours – and allow him to batter Ireland on its CT rate as compensation.

As for the Brits, I’m sorry. The concepts of competition, solidarity and co-operation are incompatible with the bulldog Tory mindset. And Cameron has more of these types on the benches behind him than any of his predecessors. I don’t envy him his task. The Lib Dems, as always, are the really useless party and Labour isn’t much better when it surveys almost total centre-right governance throughout the EU.

@DOCM,

It’s in Cameron’s instincts to be reasonable – and to be seen to be reasonable. It would be embarrassing if he were to find himself in a position where he is seen as being obstructive and unhelpful. Among all the viscitudes of life, an Englishman hates to be embarrassed above all. But he will have to bring back a slab of red meat to toss into the slavering jaws of his rabid backbenchers. And he has no real understanding of the domestic pressures Merkel and Sarkozy are operating under. I expect a small team of French and German officials are working on the side to craft something to satisfy the ‘English patient’ and that won’t have any major impact on the main package. The problem is that these officials are unlikely to comprehend the size of the slab of red meat required to stuff the mouths of Cameron’s backbenchers.

The next couple of days will be interesting.

You may not have noted it, but Prof Whelan has decided to confer ‘troll’ status on me. I’ve very much enoyed engaging with you and and with so many others on this board. I’ve learned much. I apologise for any offence I may have caused – Prof. Whelan is obviously greviously offended. I expect you will continue the good work here. Long may it continue. It requires continuous effort to retard the closing of the Irish mind.

@DOCM

The difference between the two drafts, apart from major differences in language, is that one is in the recitals or preamble to the treaty and the other is in its main operational article. If you cannot see the difference, the markets certainly can.

Fair enough – I had missed the fact that the “may” language version was only in the recitals, and so has no legal standing, while the “shall” language version was an article. Furthermore the Merkozy letter says

As far as the private-sector involvement is concerned, the ESM treaty should be revised to make clear that Greece required a unique and exceptional solution. We recall that all other Euro area Member States reaffirm their inflexible determination to honor fully their own individual sovereign signature. A recital in the preamble should clarify that the euro area will apply the IMF practice.

So effectively the PSI provisions have been removed. The July “solemn signature” nonsense pretty much undermined the original German position anyway, so much of the damage was done at that point.

There seems to be a rearguard action by the Netherlands and Finland to keep the PSI provisions in the main agreement but I wouldn’t bet the house on it. I presume Schauble, de Jager, Katainen etc. feel betrayed by Merkel’s climbdown, since it was not just a standalone issue, but a fundamental pillar of a solution that required bondholders, rather than taxpayers to pay up, at least in part. Of course when the time comes to sign the check in the future there may be some hesitation and backtracking.

@ Bryan G

The saga of the ESM treaty may yet be far from over cf. references.

http://www.irishtimes.com/newspaper/world/2011/1208/1224308743562.html

P.S. Merkel is simply covering her tracks on the PSI issue and making a pretty expert job of it.