Monday, December 05, 2011

End of the euro, Monday edition

The breaking news has already made Wolfgang Münchau's Dec. 5 column discussed below at tad dated. German Chancellor Angela Merkel met with her junior partner in the destruction of the European Union, French President Nicolas Sarkozy, and they are already fulfilling Münchau's prediction of a fatally flawed, lazy compromise. Based on the early reports, the "Merkozy" team agreed that private banks will not be asked to take any further losses on their eurozone debts except for those in Greece. And it's not clear from what I've seen whether that includes a guarantee to reckless banksters against taking further losses on Greek sovereign debt.

Münchau has been a tough critic of Angie's appalling mishandling of the European bank and sovereign debt crises. In France and Germany look set to fudge it yet again Financial Times 12/05/2011, he looks at the prospects for a successful EU summit on Friday. He makes an important characterization of what Merkel is imposing for Germany's supposedly equal EU partners she apparently sees as satellite countries to Germany:

Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance.
Once again, the purpose of the EU was to promote peace and democracy in Europe. For Merkel, its overriding purpose is to enforce the will of European business lobbies, with Germany acting as their main agent. In Italy and Greece, she and her Foreign Miniter Guido (Guido Westerwelle) have been making the proverbial offers that can't be refused, imposing governments in those two countries that are essentially debt-collection agencies for large European banks.

Wolfgang Münchau outlines the differences between the position taken by Angie and Guido (no European Central Bank [ECB] last-resort lending function, no eurobonds, an insistence that the EU - meaning Angie and Guido - have final control over national budgets), of French President Jacques Chirac (ECB as lender of last resort, eurobonds, no "fiscal union" of EU countries as advocated by Germany), and ECB head Mario Draghi (fiscal union based on austerity as demanded by Angie and Guido, then later maybe consider eurobonds and some for active role for the ECB).

Münchau expects the result at the summit to be yet another lazy compromise between France and Germany which can't solve the problem.

I suppose it will be only in retrospect that we will be able to identify the Game Over moment for the euro. It may have even been in late October, when the "Merkozy" duo first proposed the current failed remedy. But any chance for survival of the euro look slim at this point, and for the EU not much better. The end for the euro will presumably play out as some interacting combination of bank runs and sovereign defaults.

Münchau sees Herbert Hoover austerity economics as being the poison pill:

Of course, a fiscal union is not a quick fix. On the contrary, it may take 10 years, or even longer. The EU would once again have to set up a convention to make a proposal for a treaty change, to be followed by an inter-governmental conference. Some states would hold referendums with uncertain outcomes. There is no way the EU can agree on a fiscal union on Friday, and implement it on Monday. But it would be a big step if the European Council made a clear commitment for a multi-step, multi-year process.

European leaders understand the technical, and legal issues well. I am also certain that most understand that the eurozone faces an existential threat. But I doubt they have ever understood the economic and financial dynamics behind the crisis. Their narrative, which reduces the crisis to a failure of fiscal discipline, is probably the underlying reason why all their crisis resolution efforts have failed so far.

With five days to go, the world is waiting for a big political signal. What I fear is a fudge, consisting of a multi-annual fiscal retrenchment, no eurobond, at most a temporary debt redemption instrument. The ECB will provide liquidity measures to stabilise the financial sector, and it will also provide a backstop for the bond markets. But I find it hard to see how Mr Draghi can agree an unlimited guarantee in the absence of a political union and a eurobond. A strengthened stability pact is not a fiscal union. [my emphasis]
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