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Merkel demands hand over of sovereignty before any other options considered

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 [1]:

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...



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 [2]:


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 [3]:

The Tele­graph
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 Pactoffers 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 [4]. 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.
Gold­en Strings
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 [5] 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 [5]?

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 [6] that Hol­lande is fac­ing too.