Fiscal Union in the 1990s…

From the FT’s rolling blog:

  • Both Sarkozy and Merkel would prefer treaty change for all 27 European Union members. However, if this cannot be reached, they are happy to move forward with a treaty for the 17 eurozone members alone
  • The treaty favoured by Sarkozy and Merkel would include automatic sanctions for countries that breach the rule on deficits below 3 per cent of gross domestic product
  • Primary tool for enforcing balanced budgets will be a “golden rule” written into the constitutions of all 17 eurozone member states; to be verified by the European Court of Justice…..


Let’s cast our minds back to, say, October 3rd. 1990. An asymmetric shock (re-unification) struck the unsuspecting Bundesrepublik. The deficit, on the Maastricht definition, stayed below 3% until 1994 and then hit, hmmm, 9.5% of GDP in 1995. Gott in Himmel! 

The ECJ then pronounced that Germany was liable for ‘automatic sanctions’ and in 1996 ……

110 replies on “Fiscal Union in the 1990s…”

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.

“We don’t pay automatic sanctions. Only the little people pay automatic sanctions.”

Angela Helmsley, 2012

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.

None of this will matter a damn unless they require a capital adequacy rule. Capital which cannot be dissipated or diluted by buy outs. Something like what should hold for the insurance companies; only better ring-fenced.

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.

Europe has had a:
1) Banking crisis: banks holding dud capital, banks over lending in risky categories
2) sovereign debt crisis: countries issuing too much debt, unsuitable investors (see 1 above) buying it
3) currency crisis: wildly differing real economies as well as fiscal cycles not suited to a common currency

And the solution, is to control the supply side of (2)…and raise a general tax to cover (1) ?

This is exceedingly bizarre…and as Colm points out…current deficit to GDP is not the most useful of reckoners…gee…one might have thought that total debt is an issue

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.

I wonder can be strip a empire of its natural resources to sustain unsustainable credit dreams again.
Its worth a try I guess – Vlad get over here Bitch.

Agh, I see, from now an economic crisis will become a pan-European constitutional crisis as well.

Seems reasoanble

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?

@ Kevin

It it really possible that their respective economic advisors would have recommended this course of action?

I would really like their advisors to publicly state their rationale behind this.

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

I presume you are all aware of the leaked S&P report. See front page of FT – headline should be on there.

@ 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.

See here nb nb, this could send the cost of borrowing for EFSF through the roof and end any planned bailouts depending on how great these downgrades become from AAA

S&P ratings warning to top euro nations December 5, 2011 6:29 pm

S&P is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days.

We have ‘The Good’…. some agreement around some measures by the Merkozy.

‘The Bad’…..the S&P wreaking ball sledgehammer above

The Ugly…..the Irish budget.


…or should that be Delorseans? 😉

Why didn’t anyone think of this before?

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

@ Colm McCarthy

All very valid points but I would suggest that the focus of attention should really be another treaty, that establishing the ESM, which is actually going to come into force and fairly quickly.

This is the text as signed in July (including the signature of Ireland).

It will be interesting to do a compare and contrast when the amended version now agreed between the two main players becomes available. In effect, the elements insisted upon by Merkel in July, PSI, CAC’s, unanimous decision-making, and which made it effectively inoperable, have been removed.

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.

“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.

@ Ceterisparibus

An excessive diet of the Anglo-Saxon financial press is bad for the digestion. And the degree of respect shown on this blog for the German constitutional court, one of 27 in the EU, never ceases to amaze me.

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.

You have to admire the casual removal of CACs etc from the new ESM. The destruction of the peripheral bond markets at Deauville was just one of those little oversights that happen.

@ 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.

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.

@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.

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.

@ Colm McCarthy

Sorry! The word ‘entirely’ should have been inserted before ‘removed’. On the basis of the draft version of the ESM available to the media in March, it is paragraphs 2 and 3 of Article 12 that will exit the operative section of the ESM treaty.

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?

Germany has a current account surplus of 6% of GDP. Holland has a current account surplus of 8% of GDP. Call me old fashioned but nothing they do his week will even recognise this, let alone solve these imbalances (for the benefit of our German readers, a balance of payments surplus of this order of magnitude should be a source of shame, not pride). If these imbalances are not addressed, the euro is toast.
Pass the marmalade.

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.”

@ Ceterisparibus

Are you asking me to take AEP (or Armageddon Evans-Pritchard as he is affectionately known) seriously? Merkel and Sarkozy have landed Cameron and the Conservatives in deep doo dah and they know it!

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.

New social security reform
Unsurprisingly, the budget also brings yet another reform of pensions. From 2012, there will be no length-of-service retirement pensions and all pensions will be calculated by the pro-rata contribution system. The moving retirement “window” will go but the minimum pensionable age will rise to 66 for men and 62 for women. Regardless of age, it will be possible to take an “early” pension with 42 years and one month of contributions for men, and 41 years and one month for women. The index linking pensions to inflation has been reviewed. Pensions of up to twice the statutory minimum – in other words, up to about €950 a month – will be adjusted in full but all those in excess of that figure will be frozen.

Are we going to be downgraded …again…

“21.41 S&P have released a lengthy statement, which we’ll bring you in full in a few moments. For now, here’s the heart of it:
We now think that there is at least a one-in-two chance that we will lower each of the ratings that we have placed on CreditWatch. In our view, systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted.
We believe that this systemic stress emanates from five interrelated factors. We also believe that these factors influence the creditworthiness, in varying degrees, of all the members of the eurozone.”


“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.

@CMcC, DOCM et al.

It appears that the CACs will remain, but the wording on PSI will be changed, so as not to “require” it. The reality is that the current ESM treaty and the IMF rules are very close to each other, since no doubt the ESM was based on what the IMF already does. Both require two levels of PSI, depending on the debt sustainability analysis (level numbering is mine)

ESM Level 1:

If, on the basis of this analysis, it is concluded that a macro-economic adjustment programme can realistically restore public debt to a sustainable path, the beneficiary ESM Member shall take initiatives aimed at encouraging the main private investors to maintain their exposure.

IMF Level 1:

In most cases, the involvement of the private sector therefore takes the form of maintaining exposure and/or providing additional financing on terms consistent with medium-term sustainability (either voluntarily or as a result of official moral suasion).

ESM Level 2:

Where it is concluded that a macro-economic adjustment programme cannot realistically restore the public debt to a sustainable path, the beneficiary ESM Member shall be required to engage in active negotiations in good faith with its non-official creditors to secure their direct involvement in restoring debt sustainability

IMF Level 2:

In exceptional cases, the IMF may come to the conclusion that debt sustainability cannot be achieved through policy adjustment. If so, the IMF is precluded from providing further financing without assurances that the country is negotiating a comprehensive debt restructuring plan with its private creditors.

We will have to wait and see what the new wording is, and assess at that time whether the shift in position has been small, medium or large. The IMF aren’t going to rewrite their rules, which they followed in the case of Greece, so it is possible that both official creditors could start to diverge in their treatment of a given country.

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.

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…

And one more:

Mrs Merkel said the text should henceforth make clear that the euro zone will act in accordance with IMF practice in judging whether a country is bust, and so in need of debt restructuring.

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.

Given that there’s a new debt brake, which is the same as the old debt brake, and new automatic sanctions, which are similar to the old automatic sanctions, the final score is optics 1 substance 0.

@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.


“Greece has gone very quiet ”

There’s a PR blanket around the place at the moment in the build up to the 9 Decemeber summit. Negotiations around PSI also gone very quiet. Seems it’s being deliberately drawn out which I assume is eventually going to be the the benefit of the bondholders (maybe waiting for a u-turn on the Greek psi decision when they find a pile of newly printed money somewhere?).

The timing of this S and P thing is very interesting don’t you think? You would almost think there’s some kind of battle going on between those who want to see Europe sink and those who can’t afford for that to happen.

Tiny Tim is over in Europe today to see what advantage the USA can take as well as ensuring their banks don’t go bust because of defaults and CDS going pop. I still think we will see an announcement around ECB, various central banks around the world, Fed etc. lending money to the IMF so the money is there to roll everything over next year and keep those bondholders whole. The markets have basically said look what we can do to you if you don’t do as we say… give us the money and let the little people pick up the tab. Ho ho ho… Merry Christmas and trebles all round.

I must remember to go and pick up some dollars this week…. just in case.

@ 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.”

Interesting interview with Eamonn Gilmore this morning. Some real worries for us if this guy is negotiating on our behalf. Well be fubbard!
He has taken it as a given that the Euro must stay. This is not true. Unlike Greece we had a vibrant economy prior to the Euro. After initial turmoil we would return to that. It’s amazing how much stronger our negotiating position would become if we deprioritized remaining in the Euro and reprioritized Irish welfare.
Taking a sample of the views of people around that I know Irish people are more ambivalent about the Euro than Eamonn thinks. Personally Im very ambivalent. Yesterday’s budget showed how rubbish life will be like in it.
This is a bit rambling but the point is:
Eamonn – you cannot go into negotiations giving the other side what they want from the start. If this government was the govt. that extricated us from this sordid franco-German mess (even if that meant having a new currency) – that would not be a bad thing at all.
Negotiate harder. No givens. Your country needs it

@ 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?

One thing about the S&P announcement is it will refocus minds on the zeppelin debt balloon itself. Especially in Ireland its become situation where the Zeppelin has caught fire and the only thing proposed to do about it is to carry out reforms to reduce the risk of further fires breaking out in the future. In fact, the message is being sent out our economy can not only carry the weight of debt, but it can also grow out of this debt!!

Current debt levels are burning our economy and are not being dealt with? Where is the debt forgiveness for Ireland in Ireland’s current budget that will ameliorate the effects of 20% of next years tax revenues going to pay interest on debt?

At EMZ level How is the EFSF going to work and where is the money for expanded EFSF going to come from? This is a game of bluff, smoke and mirrors, confidence trickery. Message to the wolves we could have an enhanced EFSF/ESM is not being bought by the markets. They want to be shown the money. Unfortunately, there is no money as eg in Ireland’s case, money is being spent on carrying impossible debt burdens already.

We now have fire in the hold. Without answers on the table to these fundamental questions, no amount of austerity reforms, no amount of blustering from Markozy that no EMU country will default, will prevent the only way to deal with current massive debt levels across the EMZ, that is, by default.

This means the L’euro est terminé
Der euro ist fertig, the euro is finished.

I hope we have a Plan B ready for euro exit that is somewhat better than Gilmore’s myopic announcement this am that Europe should put in place its own public rating agencies to replace the privately owned S&P

@ All

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

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.

Have Mercozy decided how the rules of this would work for countries whose deficit is way over 3% at the moment?

Do they just start fining us from next year to make an example of us?
Will they give us till 2015 (a target we are unlikely to hit)?
Will they give us till whenever we get below 3%?

I guess they are not too worried about the detail for little countries like Ireland at the moment.
Or perhaps this is how they tell us we cant be in their club anymore.


You seem to be exhibiting the glee that occasionally lightens world-weariness. I actually don’t think this ‘extend and pretend’ on EZ banks is sustainable when some sovereigns are being made technically insolvent to project the optical illusion. But that’s the illusion that Merkozy are seeking to project.

The ‘disaster capitalists’, vultures, hedgies and shorters are obviously salivating at the prospect of mayhem, but is this view shared by those with ‘good money’ to invest?

Merkel and Sarkozy (and other leaders of these, apparently, well-governed ‘creditor’ nations) simply cannot afford to reveal to their voters the woeful misgovernance they sanctioned of their banks and financial sectors – and, even worse, the costs of remedying it.

The lust to be re-elected is trumping sensible policies. And this is another consideration for bond market participants. Would they prefer to deal with re-elected ‘devils they know’ or a Socialist president in France and a Red backed by the Greens in Germany. If they create mayhem now, they might wish to be careful about what they wish for.

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

So the penny has dropped that when risk increases for private investors, they demand higher rates.

There are 15 other countries besides Germany and France in this process and beyond the calamity howling of some hurlers on the ditch, they are not all run by clowns.

The automatic sanctions could be overturned by a majority of countries and this ‘golden rule’ like existing debt brakes would not prevent action in a recession. Again, 17 countries have to agree on it.

Maybe I missed proposals for reform from some contributors but the general drift is one of negativity.

I fear that the spread of the virus of Sindoinitis is past the point of no return.

We’ve already had a foretaste of a future referendum with the evoking of Neville Chamberlain tapping his cane on the cobblestones of Munich.

We’ve had very small people making charges of ‘appeasement,’ ‘capitulation’ and Ireland becoming a satellite of Germany.

A referendum will be a field day for ‘whataboutery’ and FF may well jump on the populist bandwagon and oppose it.

In the campaign for the first Lisbon referendum, the most disgusting aspect for me was the IFA trying to prevent reform of tariffs even though these people on average were getting 94% of their income from Brussels. So this time, it will surely be back to the victim’s cross in a big way.

President Stipe Mesic of aspiring member Croatia, said after the result: “Now that they have used the accession and structural funds, when they have developed enormously, I’m a little surprised that the solidarity is at an end.”

@ Joseph Ryan

Just a reminder: it was Ireland who made bank debt sovereign

As to battle cries: “Remember Limerick…”

It looks as if history will repeat itself whether in rhyme or not.

FF’s calamitous rule in 1977-1981 was soon forgotten despite the misery brought to the people.

So now, why would I not be surprised with a repetition given the obsession with laying the blame on Europe?

There are consequences for not being able to handle the truth.

@ 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.

Sir Howard Davies

‘Too many lunches in Europe – not enough decisions.’

Former Gov of Bank of Argentina during its krisis

‘To IMF: Stay out of Europe.’

Tentacles of the MatrixsQuid PR Department:

‘Go Long and Go Short – we win on way up and we win on way down’; european serfs sure are suckers – dumber than doze in the U S of A. Party On!


No comment!


Hello! Hello! Anybody at home? Hello! hello … hell ….


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.

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


Apologies. I thought you were being a tad sardonic. But they are not ‘clowns’. It is simply that their political ambition to retain power is conflicting with that needs to be done to resolve this crisis. The former is over-riding the latter. The veteran and wily Luxembourg PM, Jean-Claude Juncker, who is fully enmeshed in the machinations, once said “We know what we need to do, but, if we do it, we don’t know if we’ll be re-elected.”

The excessive and unnecessary economic pain being imposed on the PIIGS to support this ‘extend and pretend’ approach also serves the purpose of reassuring their voters that the PIIGS are being properly shriven, that they are fully repentant and resolved to reform.

One should never under-estimate the determination of politicians to retain a grip on power even when the world is falling down around their ears and their democratic legitimacy has evaporated. FF and the Greens stumbled on zombie-like for 2 and 1/2 years.

“@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.

@Eamon Moran

in fact Christine Lagarde claimed she was shocked at the action taken

Also Alistair Darling Chancellor Exchequer of UK couldn’t believe it. All they had to do was pick up the phone and tell Trichet to get ECB to deal with it. But our NTMA, bankers, cronies, politicians wanted to keep the pie to themselves. They’ve been feeding from it since!

@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.

@ seafóid

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

I’m not going to spend too much time with this; it’s like religion, Roswell, grassy knolls and so on; I wouldn’t bother trying to change entrenched beliefs or persuade fans of fairytales.

Hearsay is common but isn’t it strange that the Irish government neither officially has claimed nor provided evidence that there were discussions with the heads of the ECB, Ecofin or Eurogroup on Mon Sept 29, 2008.

The official record is that these people were contacted on Sept 30 just before a statement on the guarantee was announced to the markets.

What was thought was discussed or what wasn’t discussed in an informal phone conversation on Sept 28 is irrelevant; the decision on the guarantee was made unilaterally on Sept 29/30 as the parties involved believed that they would have not get EU approval. To say afterwards that the ECB had given approval of the guarantee is ridiculous – – but as WC Fields said, ‘there’s a sucker born every minute.’

@ 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.

@Michael Hennigan

True – the fools elected PD/FF – and in a fit of gargantuan hubris and idiocy they incompetently commiteed economic suicide on our behalf. Then we elected FG/Lab, who continue with PD/FF business as usual – acknowledging a few legacy constraints.

The only hope now is a DUP/SF takeover, we are in dire need of more ballsy protestants with Dr. Paisley coming out of retirement to shout NO NO NO to the Vichy_Financial System debts; the immediate collapse of the so-called republic; its immediate regeneration with its new .. er .. capital in Newry; immediate conscription of all unemployed or semi-employed to man the neu Hibernian Hedge Funds; and an all out onslaught on the tentacles of the matrixsquid wherever they are to be found. Then, and only then, might the eejits cop themselves on.

@ All

The Telegraph is getting worried.

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.

@ All

Le Monde summary of what the French PM had to say in parliament.

Not alone is it being put up to the UK to agree changes at 27 by March, in the event of its refusal, the 17 will proceed alone – how not being precisely specified – and others will be invited to join.

An interesting test of loyalties, especially for a country such as Poland.


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.


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…


With my little French, I don’t even have to go google to translate;
Pret…pour une ratification.

We don’t know what is in it. We do know that the people proposing it have had 15 failed attempts already. That is all immaterial.
But this treaty is not ‘pour votre consideration’ but ‘pour une ratification’.

@ 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.

@ Joseph Ryan

This is a negotiation and the participants are still at the stage of maximum bids. All three principals (Merkel, Sarkozy and Cameron) have to go home with an equal amount of explaining to do to their parliaments and electorates if the optimum result for Europe is to be achieved. There is no sign of this happening at this stage.


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.

Rumpy Pumpy’s draft proposals can be found here

From my reading this is very much a “referendum on” paper, should it survive the summit.

There are new sanctions on coordination and convergence, that are unrelated to budget discipline per se. Specifically these sanctions relate to the EU Commission’s recommendations under the European Semester that are made after National Reform Programs are submitted. The Commission FAQ on their website helpfully states “The recommendations themselves are not discussed with Member States before the Commission adopts them”. So you could be fined for failing to implement a recommendation over which you had no say when it was formulated.

The Commission are straining at the bit to get control beyond high-level macro targets. Under the quick and dirty Article 12 method, which does not even go to Member State parliaments they propose

“(Additional legislation) would allow for a higher degree of precision of the measures to be adopted by the Member States, in close partnership with the Commission, which could review and endorse the programme put forward by the Member State.”

And for full treaty change there’s:

“an enhanced role for the EU institutions, with a higher intrusiveness in the case of lack of implementation. For euro area Member States in an excessive deficit procedure, there could be a the possibility for the Commission and the Council (Eurogroup) to request changes in a draft budget before it is submitted to the national parliament if the budgetary instance is not in line with the agreed plans. In the case of euro area Member States that are under an assistance programme and persistently fail to meet the conditionality, the Commission could receive exceptional powers, such as ex-ante approval of all major economic reforms;

And on PSI they are back to incoherence again with

stating unambiguously, with regard to PSI, the commitment strictly to adhere to well
established IMF principles and practices, and clearly reaffirming that the decision taken
on 21 July concerning Greek debt is unique and exceptional. This is key to restore market
confidence in sovereign debt markets;

since they don’t understand that IMF practices sometimes require restructuring. Others (who do understand that) are apparently trying to get the IMF references in the new ESM text moved to a preamble where they will have no legal effect. What a mess.

And of course nobody is talking about the underlying causes of the debt problem, as Martin Wolf’s latest column discusses, since official analysis begins and ends with fiscally irresponsible governments. Fools and clowns all.

@Bryan G,

I see your are at idem with Hogan labelling them all as ‘clowns’ – and not only ‘clowns’, but ‘fools’ to boot. But I see them as ‘cunning clowns’. What they want is a ‘peace in the time we need to give us a sporting chance of re-election’ deal. And they are getting there. They have no idea how much treaure would be required if they were to tackle the can of worms that is their banks. It is ‘extend and pretend’ until, they hope, they are safely re-ensconced in power. (Sarkozy may be behind in the polls, but he is a formidable campaigner, and Merkel has almost 2 years to go.) And they are relying on the aversion of many bond market participants to anything far-reaching that might pull the whole temple down.

All this guff about ‘centralised fiscal discipline’ is merely a proxy for imposing sensible economic governance on the PIIGS. All polities have their own level of dysfunction – the extent of cosy deals, cross-shareholding, special subsidies and all sorts of sectional concessions in Germany is mind-boggling – but most northern EU states ‘work’ and have a degree of sensible democratic economic governance that manages the inevitable dysfunction.

The dysfunction in the PIIGS is the stuff of legend. Ireland’s ‘export enclave’ allows it to conceal the extent of dysfunction in its domestic economy; the other PIGS have nothing like that so their dysfunction is fully exposed. Germany – and its fellow ‘creditor’ states – has encountered nothing but evasion, deception, trickery and bluster in its dealings with the PIIGS. It is now determined that this has to stop. And this reflects the disgust of many voters in the northern states.

Ireland, eventually, will be found out. And it won’t be pretty. In the meantime, your ‘clowns’ are almost certain to buy the time they need. After that, who knows?

@ 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.


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.

@ Paul Hunt

If there is any lesson from history, it is that peoples prefer to be governed badly by their own rather than well by foreigners.

In the case of the EU, there is a path of joint governance – which resolves Rodrik’s trilemma – under the Community method. Van Rompuy has sketched it out. But the arrogance and myopia of the “great” powers may sink it (yet again!).


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.

@ Paul Hunt

“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”.

That is precisly what was not done and correcting this failure is what Van Rompuy now clearly sees as the preferred route out of the crisis. The term “Community method” can only be applied to legislative measures enforceable by the ECJ. But they are adopted according to democratic procedures involving the institutions of the member countries and those of the EU. This is precisely what Sarkozy wishes to avoid.

P.S. Nicked from the Telegraph which nicked it from the Times article by Cameron (behind paywall).

“But just as Germany and others have their requirements for treaty change to strengthen fiscal discipline, so Britain has its requirements for treaty change too. If we are changing the treaty that applies to all EU countries and allowing the eurozone countries to have new rules, it is also important that there are rules to keep the single market fair and open for key industries for Britain, including financial services.

Clearly, we will need to look at the right safeguards for Britain in the light of what is proposed. Our colleagues in the EU need to know that we will not agree to a treaty change that fails to protect our interests”.


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.

@ Paul Hunt

Two other snippets from the Cameron article in The Times.

“Some have argued that a treaty of the 17 would be more effective if it were applied through the various institutions of the EU such as the European Court of Justice and the Commission. But these institutions belong to all EU states and their use outside the treaty of the 27 would clearly require safeguards.”

“I have spoken about a Europe that has the flexibility of a network, not the rigidity of a bloc… A Europe that cherishes its national identities as a source of strength.”

The central point about the UK as far as France and Germany are concerned is a very simple one. The UK has never taken any risks for Europe. And there is the not inconsequential matter of the dramatic fall in the value of Sterling which has put German and French exporters at a major disadvantage without in any way compensating for the collapse of the UK as an exporter of manufactured goods.

But the extracts suggest that Cameron is willing to negotiate.


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.


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.

@Paul Hunt

The issue at hand is not some sort of beauty contest or league table of governance skills, but whether giving the Commission (Rumpy Pumpy’s proposals) or ECOFIN (Merkozy proposals) intrusive powers to intervene in Ireland’s national budget is in the interests of the Irish people. The issue is not simply bringing a better skillset to bear on the problem, in the same way Jose Mourinho could be brought in to improve an English football team, but the fact that the individuals involved will be looking after their national interests first (or their national bankers’ interests as the case may be) and the plain people of Ireland second. The last three years have made that abundantly clear.

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