Friday, November 25, 2011

A lost decade?

The leaders of Germany and France are again taking the lead in attempting to solve the European debt crisis. And again, as Bloomberg reports, the discussions center around allowing for more direct involvement in the financial affairs of any one nation.

The initiative announced (Thursday) at a meeting in Strasbourg, France, involving German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti underscored their failure the past two years to stamp out the financial crisis. Just yesterday, concerns the euro was at risk undermined a bond auction in Germany, the biggest euro economy and until now an investor haven.
The planned treaty changes prepared for a Dec. 9 European summit involve “the question of a fiscal union, that is a deepened political cooperation,” Merkel told reporters after the meeting over lunch. “It’s not about a quid pro quo. It’s about overcoming the defects in the euro zone’s construction, step by step.”
Merkel won backing on demanding changes to treaties as a prerequisite to discussing the issuance of common euro bonds. She also persuaded Sarkozy to refrain from demanding that the European Central Bank play a more active role.
“The fiscal union requires rules, it requires mechanisms for the credible implementation of those rules,” Monti said at their joint press conference. “Within this context the stability bonds, as the European Commission called them, may provide a relevant contribution. Everything is possible within a sound fiscal union.” 
That might be true, but as Deutsche Welle notes, Chancellor Merkel is not getting the widespread support she'll need to get any treaty changes enacted.

The eurozone debt crisis seems to be heading into its final battle. Tempers are frayed and the main parties are still pulling in different directions. While EU Commission President Jose Manuel Barroso is pushing for Eurobonds, Merkel emphatically rejects the idea. The southern member states in particular want the European Central Bank (ECB) to be able to buy up unlimited sovereign bonds, which is, essentially, another way to make European debt a communal responsibility. But Merkel has also dismissed that idea.
Much to Merkel's chagrin, even France is sending mixed signals and, traditionally, the country is more affiliated with the southern European states anyway. But that is not all - it is not just France that has to worry about its triple-A credit rating these days, even Germany is not immune to the debt demons.
With that as the backdrop, it's not hard to understand why the president of the Czech Republic recently warned his fellow European leaders and nations that the continent could face a decade or more of financial misery unless it figures out a way to rein in the debt crisis.

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