Next week's EU summit and the failure of European leadership

A couple of Bloomberg News reports gives some idea of the discussions that we are likely to hear about in next week's EU summit: James Neuger and Mark Deen, Euro Chiefs Spar On Greek, Spanish Aid In Summit Clash Preview 06/21/2012; Jeff Kearns, IMF Sees Euro Crisis At Critical Stage, Sees Bank Stress 06/21/2012.

Angela Merkel's policy toward her European "partners"

The summit will be the first big public test of how serious French President François Hollande is about forcing German Chancellor Angela Merkel to renegotiate her ruinous fiscal suicide pact that she demands that other eurozone and EU members accept.

One can only hope that what we've seen in Germany the last few days is not a test drive for the confrontation between Holland and Merkel.

The fiscal suicide pact - formally the Intergovernmental Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union - is a plainly bad idea. It sets as a constitutional requirement in approving countries a debt limit as a percentage of GDP. Angie's purpose with it is to outlaw Keynesian economics, i.e., the only kind that works in depressions. It writes an essentially arbitrary debt percentage into the countries constitutions that is not only based on a fool economic theory, but is also dependent on accounting conventions. Even in terms of saving the euro, it's a bad idea. It's just a plainly bad idea.

The German Social Democrats (SPD), who have been severely corrupted by neoliberalism especially during the last decade, have been winning in state (provincial) elections because voters are increasingly critical of Angie's conservative Christian Democratic Union (CDU). That and the victory of their follow Socialist International party in the French Presidential election energized the SPD to at least postpone approval of the fiscal suicide pact until June. Angie had demanded they pass it in May.

But now they and the Green Party as well have agreed to what sounds like an Obama-style compromise, in which the conservatives get exactly the bad policies they want and the conservatives agree that, yeah sure, we're concerned about your issues and one of these days we'll get around to enacting what you want (when Hell freezes over, yuck, yuck). Angie agreed that later on down the road toward the end of the year she would agree to a financial transaction tax, also known as a Tobin tax, to discourage financial speculation. And she agrees they should spend a few more euros alleviating youth unemployment in Germany. (Regierung und Opposition einigen sich auf Fiskalpakt Spiegel Online 21.06.2012)

Neither the SPD nor the Greens seem to have had any inclination to oppose this things because it's obviously a bad idea.

It's striking in Neuger's and Deen's report that saddling Spain with new debt to bail out banks and their stock and bondholders seems to be a no-brainer for the EU bigwigs:

Loans to Spain will start from the temporary rescue fund, the European Financial Stability Facility, before being "transferred" to the permanent fund once it is set up, Luxembourg Prime Minister Jean-Claude Juncker said. EFSF loans have not enjoyed seniority.

Spain’s package will be finalized on July 9, the same date that the permanent fund, the European Stability Mechanism, is scheduled to go into operation. Its bond-seniority clause is open to interpretation, based on a declaration by euro leaders "that the ESM loans will enjoy preferred creditor status" without a binding rule.
Regling’s View

"This is not as important a question as it may seem," Juncker said. The temporary fund’s manager, Klaus Regling, said the loans would increase Spain’s debt by only 10 percent of gross domestic product, making the question of preferred status "not quite as important as one gets the idea reading it every day." [my emphasis]

But the austerity program imposed on Spain because of the exiting public debt is a serious enough a problem for these servants of the European One Percent that they are forcing ruinous cutback in Spain at a time where youth unemployment is already at 50% or more, genuine depression levels of distress.

Kearns' report is on an IMF statement that makes its priorities for Europe clear. Want to guess if creating jobs and countering the depression is at the top of the list?

"The immediate priority is concrete action toward a banking union for the euro area," the IMF report said. "The proposed EU framework for harmonized national bank resolution processes is a necessary first step. But it needs to go further. A deposit guarantee scheme needs to be established at the regional level to help break the links between domestic banks and their sovereigns, and support depositor confidence."

The text of the IMF statement is here: 2012 Article IV Consultation with the Euro Area Concluding Statement of IMF Mission 06/21/2012.

It does talk about job-related policies:

Services sector reforms in the surplus economies could improve disposable incomes and lead to higher external demand, including for deficit economies.

Translation: weaken unions, cut public services, privatize state enterprises.

Lowering unit labor costs in the tradables sector is essential for deficit countries. This means productivity-enhancing reforms (e.g., lowering barriers to entry, making it easier for small firms to expand into foreign markets) and labor market measures that ensure that nominal wage developments are aligned with productivity growth.

Translation: weaken unions, cut wages and salaries, deregulate even more.

To restore growth across the union, long-standing structural rigidities need to be tackled to raise long-term growth prospects. In many countries, labor market reforms are needed to raise participation and address disparities in protection that confine “outsiders” (typically younger workers) to low-wage, temporary jobs.

Translation: weaken unions, cut wages and salaries, reduces protections for workers.

To foster relative price adjustment between the North and the South, monetary policy should ensure that overall inflation does not drop far below the two percent for the euro area as a whole, while allowing for larger inflation differentials between North and South.

Translation: austerity, austerity, austerity. This one at least has the tiny virtue of pointing to the fact that any realistic plan for saving the euro would have to include persistent higher inflation in Germany than in the "periphery" countries of the eurozone.

Fiscal consolidation should proceed decisively and credibly where market pressure is high, but more gradually elsewhere to help support demand in the region. To this end, it is important to focus on fiscal targets expressed in structural, not nominal, terms, and anchor them by fully-specified multi-year plans. In this context, the flexible implementation of the current fiscal framework is essential.

Translation: austerity, austerity, austerity, with cosmetic changes to allow pro-austerity policies to pretend they care about unemployment and the self-destruction of national economies.

With leadership like that, the prospects for a happy ending to the euro crisis are practically nil.

Tags: angela merkel, austerity economics, eu, euro, european union, france, françois hollande