Towards the next “comprehensive package”
- The eurozone is working frantically on a package of treaty change and fiscal reform;
- France and Germany are still a long way away from a compromise, and it looks that this may go down to the finishing line;
- Germany insists on an automatic sanction mechanism and a formal transfer of budgetary sovereignty to the EU;
- other elements up for negotiation are a eurobond, private-sector participation, a bank licence for the ESM, and of course the ECB’s involvement;
- the Irish government said it would have to call a referendum if any powers are transferred to EU level;
- Wolfgang Münchau argues that Angela Merkel’s fiscal union is not a fiscal union at all, merely an enhanced stability pact that does not address the crisis;
- Gavyn Davies says the eurozone is headed for a fiscal regime that will be restrictive no matter what the economic circumstances;
- Mario Monti presents his “Save Italy” decree, consisting of net savings of €20bn from a crackdown on expenditure, and tax increases;
- his government is now forecasting a recession for 2012, and stagnation in 2013;
- Greece faces a crucial week with important budgetary decisions;
- Ireland is about to unveil a tough five-year budget plan;
- France is experiencing an outbreak of Germanophobia, as various politicians on the left compare Merkel either with Bismarck or with Hitler;
- French PM Francois Fillon condemns this outbreak of anti-German sentiment, and says the goal was to overcome national and build Europe;
- FDP chairman Philip Rösler says his party will leave the government if Merkel comes back with a eurobond;
- Peer Steinbrück says the SPD will not form a Grand Coalition with Angela Merkel this time;
- bank economists, meanwhile, put the chances of a euro breakup at 10-30% according to a poll.
Today’s news is dominated by the Franco-German attempt to seek a compromise over treaty change to enforce budgetary discipline. Germany is pushing hard for an automatic sanctioning mechanism, and a de facto transfer of budgetary sovereignty to the EU, while France resists this pressure. Separately, there is also the question to which extent a full treaty revision is feasible. Third, the ESM Treaty is up for negotiation, as Germany may be prepared to drop its insistence on private sector participation; fourth, the level of ECB involvement is subject to discussion, including the issue of a banking licence for the ESM; and there is the question to which extent a fiscal union should be complemented by a eurobond, and if so, what kind of a eurobond.
According to the FT, Ireland would have to hold a referendum on a large treaty change, as proposed by Germany. A referendum is necessary under the Irish constitution if power is transferred from the state to the EU – which is clearly the case if Merkel’s proposals are adopted. (That story highlights the implementation risk of any agreement on Friday, an issue which may surface relatively soon after the summit.)
Negotiations continue. It looks like the combatants are going to take this down to the finishing line.
Wolfgang Münchau on Merkel’s “fiscal union”
Writing in the Financial Times, Wolfgang Münchau argues that Angela Merkel’s fiscal union is not a fiscal union at all because it lacks the two central element of such a construction, a minimally sufficient central budget and a common bond. This is a stability pact on steroids. He says that EU leaders are wrong in reducing the eurozone crisis to fiscal policy alone. He says the eurozone needs the following crisis resolution strategy: 1. ECB backstop in the short run, and a eurobond in the long run. 2. Dropping any notion of private sector involvement. 3. Addressing the credit crunch and the recession. 4. Reforming the governance framework, with a goal to focus on the eurozone’s wider imbalances, including, but not only, fiscal. Münchau concludes that the most likely outcome is a vastly reduced subset of that list.
Gavyn Davies on Germany’s victory
Gavyn Davies writes in his FT blog that the way the debate is going, it looks that Germany is going to win with its hardline fiscal position. He said the new fiscal union will differ from the SGP in four important dimensions. 1. The definition will be stricter, as countries with high debt-to-GDP ratios will have to run surpluses until the debt-to-GDP ratio falls to 60%. 2. There will be a new compliance procedure. 3. There would be automatic sanctions of 0.2-0.5% of GDP. 4. Countries would introduce balanced-budget rules in their constitutions. He concludes: “And that means that the eurozone is about to lock itself into a fiscal regime which will increase the likelihood of medium term budgetary tightening, come economic hell or high water.”
Monti’s manovra
Mario Monti’s government has settled on a €20bn net austerity package for 2012-2014, dubbed the “Save Italy” degree. Il sole 24 ore has the details. The gross savings are €30bn, of which one third comes in the form of spending cuts, and two thirds in the form of various tax increases, including VAT, housing taxes, a luxury tax, an increase in the pension age, but no increases in income and capital gains taxes. More details on the package are to be released today. About €10bn will be reinvested in the economy through new programmes. The Italian government is also now officially expecting a recession in 2012, with a fall in GDP by 0.4-0.5%, and stagnation in 2013. Reuters quotes Vittorio Grilli, deputy finance minister, as saying that the despite the recession, the programme is tailored to meet the 2013 balanced budget goal.
Crucial week ahead for Greece
Crucial week ahead for Greece, with the IMF approval of its sixth loan tranche due on Monday, the likely parliamentary approval of the 2012 budget on Tuesday, the start of talks with troika officials on the new €130bn aid package, ahead of the European summit on Thursday and Friday overshadowing all other events, writes Kathimerini.
Enda Kenny appeals to Irish before budget plan is unveiled
Ireland’s government unveils on Monday and Tuesday its five-year term budget plan, with details known already though Reuters. Growing concern about the economy prompted Enda Kenny on Sunday night to make a televised address to the nation, the first by a prime minister since 1986, to warn of tough times ahead. Kenny said this budget will be the toughest of a four-year run of belt-tightening and the narrative that the worst is nearly over, but economists are warning that a global downturn means the worst may be yet to come. Kenny said he wanted to be the prime minister “who retrieves Ireland’s sovereignty”, according to the headline in the Irish Times. Kenny told the Irish: “you are not responsible for this crisis”, according to the Irish Independent.
Germany takes over center stage in French presidential election debate
The relationship with Germany and the perceived French weakness in the crisis has taken the center stage in the French presidential election debates. Former prime minister Laurent Fabius told Le Parisien that the Franco-German couple could only work „on the basis of equality“. However, due to the „French weakness and the German stubbornness it has become unbalanced and that is dangerous“, he warned. Francois Hollande is at the SPD party congress today. Last week in Brussels he let it be understood that he thought that once elected he would have a stronger legitimacy than Angela Merkel who by then will be at the end of her second mandate, according to Les Echos. On this basis Hollande will then try to rebalance the relationship with Germany by proposing a „responsibility pact“ that includes among other things eurobonds and a stronger role of the ECB. Hollande will today address the party congress and seeks to meet Merkel in the beginning of 2012.
Meanwhile Francois Fillon attacked the Socialists for their Germanophobia, according to Le Figaro. „It is irresponsible and indecent to play with national feelings that belong to the past and that we don’t want to resuscitate“, he said adding that it was „dangerous to instrumentlise patriotism to caricature and hurt our partners“ while it is necessary to „federate our respective national forces to relaunch Europe“.
The argument came up because the former candidate for the presidential primaries Arnaud Montebourg said Merkel was conducting a „Bismarck style policy“ and the Socialist deputy Jean-Marie Le Guen compared Nicolas Sarkozy in dealing with Merkel with Edouard Daladier, the French prime minister who signed the Munich Agreement with Adolf Hitler in 1938. Both Montebourg and Le Guen were forced into involuntarily comic explanations to justify their remarks. „Bismarck was a political genius who created social security, unified Germany and declared war on France because of the weakness of Napoleon the Small“, Montebourg said. „I talked about Daladier and not about Germany, but rather about how a French leader came back from a negotiation where had not obtained anything with an attitude of triumph“.
The two major papers run editorials warning of the dangers of a renewed Germanophobic feeling in France. „Some Sociliasts are behind their Maginot lines“ is the title of Le Monde’s unsigned front page editorial, Le Figaro’s editorial runs under the title „The return of the anti German discourse“.
No Eurobonds and no Grand Coalition
FDP party chairman and economics minister Philipp Rösler categorically ruled out Eurobonds. „With this government there will not be any Eurobonds“, Rösler told Frankfurter Allgemeine Sonntagszeitung, implicitely threatening to leave the coalition if shared liability was one of the outcomes from the EU summit. At the same time Peer Steinbrück, former SPD finance minister and potential challenger to Angela Merkel in 2013, ruled out a Grand Coalition between the Social Democrats and the SPD. „If the love relationship between black and yellow (political colours for the christian democrats and the liberals) fails and there will have to be a divorce lawyer, then this must be German voter, there will have to be new elections“, Steinbrück told Bild am Sonntag.
Bank economists price in a failure of the euro
A majority of bank economists think the break-up of the eurozone is a plausible scenario with a probability between 10% and 30%, according to a survey done by Financial Times Deutschland among 26 economists from international banks. None of them totally exclude an implosion of the common currency and there were only two who put the probability of survival at 95% or 99%. On the other end of the scale one economist thought the likelihood of a break up was 60%, another one even said it was 70%. 22 of the 26 economists said it was between 10% and 30%.
Spreads, Forex, ZC Swaps and Ois-Libor Spread
Side ways over the weekend.
10-year spreads
Previous day
Yesterday
This Morning
France
0.980
1.183
1.175
Italy
4.614
4.744
4.730
Spain
3.654
3.596
3.637
Portugal
11.878
11.952
11.709
Greece
27.930
28.346
30.79
Ireland
7.131
7.139
7.363
Belgium
2.641
2.600
2.615
Bund Yield
2.134
2.087
2.101
Euro Bilateral Exchange Rate
Previous
This morning
Dollar
1.346
1.3405
Yen
104.710
104.54
Pound
0.859
0.8591
Swiss Franc
1.233
1.2361
ZC Inflation Swaps
previous
last close
1 yr
1.9
1.9
2 yr
1.84
1.87
5 yr
1.87
1.91
10 yr
2.16
2.17
Euribor-OIS Spread
previous
last close
1 Week
12.413
12.413
1 Month
53.000
53.799999
3 Months
91.188
92.888
1 Year
155.938
155.037994
Source: Reuters
