The once unthinkable is now an agenda item for a June 28-29 EU summit: A “fiscal compact” treaty that will create a new budget oversight agency with a proposed list of powers that seems to grow by the day. This includes the authority to “harmonize” labor laws, tax-policies, and social security systems. Not only the will this new “authority” have the power to veto and direct the budgets “priorities”, but Merkel is now calling for it to have the power to review national budgets before they’re drafted.
In other words, each eurozone member’s national government is to become a rubber stamp for “the authority”. Cartman would be proud. And what do the economically distressed eurozone members get in exchange for handing their sovereignty over to Berlin? Eurobonds that help pool the risks and lower the cost of borrowing, right? Nope, that’s still off the table. As per usual Eurobonds are sort of on the agenda. But these eurobonds are way less , umm, “fun” than the prior eurobond proposals.
For starters, the Bundesbank argues eurobonds already exist in the form of the implicit liability the ECB has if a member nation ever dumps the euro and leaves. It hails from the storied who-needs-brakes-I-have-an-airbag school of risk management. It’s a hell of a thing to watch not one but a whole collection of free societies openly embrace a system of planned disaster capitalism run by people that are obviously lunatics:
Eurozone bonds some way off, risk-sharing already reality
By Ana Nicolaci da Costa
LONDON | Mon May 28, 2012 11:41am EDT
(Reuters) – Germany keeps reaffirming its long-standing opposition to shared euro zone bonds but analysts say the region is already headed towards implicit mutual responsibility for national debts and Berlin will come under increasing pressure to succumb.
The region’s complex TARGET2 payments system, which hosts payment flows between euro zone member states, suggests there is already a good deal of risk-sharing implicit in regional structures, not to mention the exposure the European Central Bank has to peripheral debt.
That shared liability may fall short of the kind of joint risk-taking foreseen for a common bond, where one country is responsible for the non-payment of debt by another.
But analysts say the build up of imbalances in the system – as the ECB replaced private sector lending which dried up for peripheral countries – reflects the latest in a number of crisis-fighting steps that have increased regional integration.
Economists say the imbalances carry only become a problem when one or more countries leave the euro.
But if a member state does exit and its central bank is not able to honor its liabilities with the ECB, the cost could end up with the rest of national central banks.
The prospect of an euro exit is no longer so far fetched. The once unmentionable is now openly discussed by officials.
“If there are losses on these claims that the ECB has, these losses get distributed in the euro area as a whole, according to (national central banks’) capital shares at the ECB,” said Guntram Wolff, deputy director of Brussels-based Bruegel think-tank, which published the Blue Bond proposal outlining a possible structure for common debt issuance.
“So in that sense it’s a euro bond but a special euro bond which … takes on a risk and distributes this risk in the entire euro system.”
So ‘No’ to eurobonds – something that officials admit would help the weaker nations avoid being forced out the eurozone – because the ECB will pick up the tab if/when the weaker nations are forced out of the eurozone. Ok then.
Continuing with the article…
MERKEL UNBUDGEABLE FOR NOW
Berlin opposes the concept for fear it will end up paying for overspending in peripheries. Only when it sees the risks to the euro zone of not acting as greater than the domestic political cost of putting Germany ever more on the hook, is it likely to budge.
Chancellor Angela Merkel, who faces elections next year, showed no sign of dropping her objections at a summit of European Union leaders last week, but new French President Francois Hollande is an advocate.
Merkel insists euro zone bonds can only be discussed at the end of a long process towards fiscal integration. Even if she agreed, it would require the European Union treaty to be changed, a process that typically takes months or years, not weeks.
“It is unlikely, notably for legal reasons, that the ‘silver bullet solutions’ which investors would like to see, such as Eurobonds … can be easily envisaged in the timeframe relevant for the current financial turmoil,” said Deutsche Bank economist Gilles Moec. “Indeed, vocal opposition to Eurobonds is not weakening in Germany.”
But if a Greek euro exit materializes, which elections next month could hasten, contagion will spread and emergency crisis action of some sort will be needed. Many analysts see common bonds as the best way of solving the crisis.
The Bruegel institute in May 2010 published the Blue Bond proposal which foresees a pooling of a chunk of national debt into a senior blue bond with joint liability and anything beyond that issued as national, junior paper.
The idea is to secure a liquid pool of debt with low borrowing costs on the one hand, and keep incentives for fiscal discipline on the other.
“That’s the route that we may go down. And it may well be that the European Stability Mechanism (ESM) represents the first stage of that,” James Nixon, chief European economist at Societe Generale said.
The ESM is the euro zone’s permanent rescue fund which will take over responsibility for future bailouts in July.
At the end of the article it’s noted that the new European Stability Mechanism (ESM) that comes into effect in July – a permanent replacement to the existing ad hoc crisis response funds – is also seen as a possible stepping stone for a “Blue Bond”-like proposal, where some set percentage of national funding is covered by a eurobond and the rest is the sole liability of individual nation. That’s quite similar to another proposal that’s recently come out of the German Council of Economic Elders: The European Redemption Pact, where 40% of a nation’s debt is covered by jointly-issued eurobonds and the rest is the obligation of the nation. It’s being hailed as ‘ingenious’ because it would bypass a ruling last year by the German constitutional that prevents Germany from ever giving up its budget sovereignty, something the high court described as “fundamental” to self-determination. This reasonable declaration about the fundamental necessity for budget sovereignty was made in a court case centered on the legality of bailout funds for Germany’s neighbors. You know, the same neighbors that are getting loss of budget-sovereignty (and a bunch of other sovereignty) as part of the preconditions for their “bailouts”. You can’t make this stuff up:
Ruling in Greek Aid German Court Rejects Challenges to Euro Bailouts
dsl — with wires
Germany’s highest court has ruled that relief for Greece and the euro bailout program is constitutional. As expected, the judges are demanding a greater say for parliament in future decisions on providing aid to beleaguered euro-zone member states.
In a tensely anticipated judgement, the German Federal Constitutional Court moved on Wednesday morning to reject several legal complaints that had been filed against Germany’s participation in massive efforts to prop up the European common currency.
The court said that the billions in aid provided by Germany in capital and guarantees to highly indebted partner countries in the European Union to shore up the euro had been constitutional. At the same time, the court stipulated that the German federal parliament, the Bundestag, needs to be given a greater say in future bailout measures.
Presiding Judge Andreas Vosskuhle said the verdict “should not be misinterpreted as a constitutional blank check for further rescue packages.”
The judges ruled that aid package resolutions cannot be automatic and may not infringe on the decision-making rights of parliament. Aid packages have to be clearly defined, and members of parliament must be given the opportunity to review the aid and also stop it if needed, the ruling said. “The government is obligated in the cases of large expenditures to get the approval of the parliamentary budget committee,” Vosskuhle said. The court said that check and balance was needed to ensure parliament retained its sovereignty over the budget, which it described as a “fundamental element” of democratic self-determination.
Ok, so the German Council of Economic Elders (awesome name BTW) has a plan that creates a sort of hybrid 20-year eurobond. And this plan strongly supported bv the SPD AND Greens according to the following article. But the plan also somehow ensures that this new system – hastily created in a bizarrely rushed constitutional crisis following a bizarrely exacerbated economic crisis – doesn’t violate last November’s German high court ruling that no loss of budget sovereignty take place in any future bailouts. So how does it pull it off? Well, for starters, the proposed 40% joint bond issuance would come with strings attached. Golden Strings. More specifically, gold bullion equal to 20% of a “to-be-redeemed” nation’s debt is to be handed over as collateral. The Elders apparently want to assure the public not to worry about the gold. It will only be seized of there’s a problem with a country meeting it’s debt repayment obligations. This is the message being sent to nations that are currently having troubles paying their debts. It’s like they’re not even trying anymore:
Europe’s debtors must pawn their gold for Eurobond Redemption
Southern Europe’s debtor states must pledge their gold reserves and national treasure as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany.
By Ambrose Evans-Pritchard, International business editor
5:22PM BST 29 May 2012
The German scheme — known as the European Redemption Pact — offers a form of “Eurobonds Lite” that can be squared with the German constitution and breaks the political logjam. It is a highly creative way out of the debt crisis, but is not a soft option for Italy, Spain, Portugal, and other states in trouble.
The plan is drafted by the German Council of Economic Experts and inspired by Alexander Hamilton’s Sinking Fund in the United States — created in 1790 to clean up the morass of debts left by the Revolutionary War. Flourishing Virginia was comparable to Germany today.
Chancellor Angela Merkel shot down the proposals last November as “completely impossible”, but Europe’s crisis has since festered, and her Christian Democrat party has since suffered crushing defeats in regional elections.
The Social Democrat opposition supports the idea. The Greens say they will block ratification of the EU Fiscal Compact in the German Bundesrat — or upper house — unless Mrs Merkel relents.
“The Redemption Pact cleverly combines the advantages of lower interest rates through joint European borrowing with a reduction of debt,” says Green leader Jürgen Trittin. “Joint liability would be limited in both time and scale.”
The plan splits the public debts of EMU states. Anything up to the Maastricht limit of 60pc of GDP would remain sovereign. Anything over 60pc would be transfered gradually into the redemption fund. This would be covered by joint bonds.
Italy would switch €958bn, Germany €578bn, France €498bn, and so forth. The total was €2.326 trillion as of November but is rising fast as Europe’s slump corrupts debt dynamics. The sinking fund would slowly retire debt over twenty years, using designated tithes akin to Germany’s “Solidarity Surcharge”.
Note that the “Solidarity Surcharge” that the Redemption pact is being compared to was a tax started in 1993 to finance the rebuilding of East Germany, including physical infrastructure projects. I’m not aware of a similar committment to rebuild the physical infrastructure of the “redeemed” eurozone members but I’m sure there’s some sense of solidarity tucked away in there. Somewhere.
The ingenious design gets around the German constitutional court, which ruled in September that the budgetary powers of the Bundestag cannot be alienated to any EU body under the Basic Law — the founding text of Germany’s vibrant post-War democracy.
The court warned that open-ended liabilities are unconstitutional. The Bundestag may not establish “permanent mechanisms which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate,” it ruled. Chief Justice Andreas Vosskuhle said that any major step towards EU fiscal union would require “a new constitution” and a referendum.
The fund implies a big sacrifice for Germany. Its interest costs on joint debt would be much higher than today’s safe-haven rate of 1.37pc on 10-year Bunds. Jefferies Fixed Income says it would cost 0.6pc of German GDP annually. The Council of Experts — or `Five Wise Men’ — argue that this would be modest compared to the growth adrenaline of rescusitating monetary union.
Yet it is not charity either. One official said a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. “We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation,” he said.
Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. “The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations,” said the proposal.
This demand could enflame opinion in Italy and Portugal. Both states have kept their bullion, resisting the rush to sell by Britain and others. Italy has 2,451 tonnes of gold, valued at €98bn in March.
Alessandro di Carpegna Brivio, a gold expert at Camperio Sim in Milan, said Italy should treat such proposals with care. “Everything being done at a European level is in the interests of Germany and France, to save their banks. It is not in the interest of Italy,” he said.
Yes, the grand plan to save the eurozone is now a 20-year 1-strike-and-you’re-out rescue policy. Why only 1-strike? Well, in the event that it can’t “meet its payment obligations”, after that gold gets seized and the state assets are privatized it’s sort of hard to see what a country is supposed to do next (presumably it’s kicked out of the eurozone and turned into some international pariah or some other form of compassionate tough “love”). And this is the plan that the German Left is championing…it’s apparently been too generous for Merkel’s taste.
So what about the rest of the eurozone? Is there going to be any meaningful push back following France rejection of the great Merkozy in favor of socialist Francois Hollande? Will Hollande provide the much needed counterbalance to the seemingly unstoppable push towards a “fiscal union” that turns national parliaments into little national jokes and treats the immediate fiscal crisis like it’s golden firesale? Will there be any real pushback at all? Are you kidding?
Europe mulls major step towards “fiscal union”
By Noah Barkin and Daniel Flynn
BERLIN/PARIS | Sun Jun 3, 2012 1:45pm EDT
(Reuters) – When Jean-Claude Trichet called last June for the creation of a European finance ministry with power over national budgets, the idea seemed fanciful, a distant dream that would take years or even decades to realize, if it ever came to be.
One year later, with the euro zone’s debt crisis threatening to tear the bloc apart, Germany is pushing its partners for precisely the kind of giant leap forward in fiscal integration that the now-departed European Central Bank president had in mind.
After falling short with her “fiscal compact” on budget discipline, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.
She is also seeking a coordinated European approach to reforming labor markets, social security systems and tax policies, German officials say.
Until states agree to these steps and the unprecedented loss of sovereignty they involve, the officials say Berlin will refuse to consider other initiatives like joint euro zone bonds or a “banking union” with cross-border deposit guarantees – steps Berlin says could only come in a second wave.
Ok, so we’ve gone from calls for a “fiscal union” that Merkel opposed a year ago to today’s calls by Merkel for a far more expansive fiscal union that appears to explicitly give Berlin sovereignty over its neighbors budgets, and agreement to this new vassal-state union is being called a prerequisite if Berlin is to consider any other options. Wow. An entire continent is getting scammed by the most overt and extreme form of political blackmail I think I’ve ever seen. Thanks Europe, I’m no longer quite as ashamed by my fellow Americans’ collective propensity for falling for jaw-droppingly blatant political cons. This is clearly a global phenomena.
Continuing with the article…
Spain, whose banking troubles have made it the latest target of financial markets, signalled over the weekend that it was on board with a key element of the plan.
Prime Minister Mariano Rajoy backed the creation of a new euro-wide fiscal authority of the kind Trichet sketched out in a speech in Aachen, Germany last year.
But other states, including the bloc’s second-biggest member France, have deep reservations about ceding so much sovereignty.
New President Francois Hollande rode to victory in a French election last month promising new steps to boost growth. At the EU summit later this month, he and other leaders were expected to gang up on Merkel, pressing her for new growth-enhancing measures.
But after a series of modest concessions from the German leader, a loose consensus on a growth strategy already appears to have been reached weeks before the leaders meet.
Now, the main focus of the summit seems likely to be on steps needed for a “fiscal union”, a debate which puts Hollande in a far more difficult position, even if people who know him well say his vision of Europe is much closer to the federalist German model than those of his Gaullist predecessors.
“It’s a big challenge for Hollande,” said a senior French official who declined to be named. “I think that he is ready for (closer fiscal integration) but I think the rest of the French political class – both on the left and right – is not.”
The hope in Berlin and other capitals is that if leaders can present a credible plan for moving towards a fiscal union, further contagion – even in the event of a Greek exit from the euro zone – can be limited, one senior central banker said.
But even if the Germans do win over the French and other sceptical countries like Finland and Austria, there are serious doubts about whether a 5-10 year plan for closer integration – weighed down by lengthy national debates over treaty change – will be enough to restore investor confidence now.
Ha! Yes, Hollande’s big challenge is convincing the rest of France’s elites to agree to sign away the nation’s budget, tax, and labor policies. Oh my have things gone awry over in the eurozone. And even if there IS a fiscal union put into place and the eurozone turns into some weird German vassal-state dominion, EVEN THAT might not be good enough for “the markets” to restore “investor confidence”. Wow, “the market” is apparently dominated by lunatics that want to see some sort of radical overhaul of the right to self-determination. That seems like one of the issues that Hollande is facing too.