Wednesday, December 7, 2011

Merkozy failed to save the eurozone

by Martin Wolf

Financial Times

December 6, 2011

Two heads, it is said, are better than one. In the case of the meeting between Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, the French president, that was not the case. If the conclusions give cover to a decision by the European Central Bank to intervene still more in public debt markets, it might offer some relief. But, like the Bourbons, the leaders seem to have learnt nothing and forgotten nothing.

What was agreed? The decisions seem to include: not compelling private bondholders to take losses on eurozone bail-outs, though voluntary restructuring remains possible; greater likelihood, though no automaticity, of sanctions on countries that fail to stay within the limits on budget deficits; inserting a balanced budget requirement into the domestic legislation of members; introduction of the European Stability Mechanism – the permanent rescue instrument – in June 2012, instead of June 2013; and monthly meetings of the European heads of state and governments, during the crisis, to oversee policy co-ordination.

Gone, then, is forced “private sector involvement” in rescheduling of debt, which will delight the ECB. Gone are automatic sanctions on fiscal “sinners” and review of breaches of fiscal rules by the European Court of Justice. This will delight France, which also obtained agreement that an intergovernmental accord among eurozone members might take the place of a new European Union treaty. Germany did not leave quite empty-handed: it managed to rule out “eurobonds” – joint issuance of sovereign debt – once again. But it does not seem to have got much.

Might this agreement encourage the ECB to intervene more heavily in markets for sovereign debt? Mario Draghi, its new president, told the European parliament last week that an agreement to bind governments on public finances would be “the most important element to start restoring credibility” with financial markets. “Other elements might follow, but the sequencing matters,” he added. The fiscal and reform measures announced by the technocratic government in Rome may help give the ECB the green light for those “other elements”. Markets have responded, in hope: Spain’s 10-year bonds were down to 5.2 per cent, and Italy’s to 6.3 per cent, on Monday. But Standard & Poor’s decided to put the eurozone on negative watch. Fragility remains the watchword.

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