Partial EU Pact Reached

There’s a joke told about Gorbachev who, when asked to say one word about the state of the Soviet economy responded: GOOD. When asked for two words: NOT GOOD. The same could be said about the agreement reached Friday. The agreement is good in that the pact on fiscal union gives the ECB what it needs to become a lender of last resort if and when it becomes necessary. Good in that progress was made with regard to increasing the firepower of the loan guarantee mechanisms, the EFSF and ESM. Good in that it did not give Cameron the concessions for the CITY in exchange for his buying in. However, the agreement is not good in that it did not even consider euro-bonds or any other form of pooling member-state debt. It is not good with regard to the substance of the fiscal union, which is all about austerity, with nothing to promote growth. And there is nothing on political union. We remain with technocratic oversight of member-state budgets, and intergovernmental bargains. With no thought to building in democratic legitimacy, say, through European Parliamentary involvement. If the fiscal union fails to promote growth, can EU leaders really expect fellow leaders to toe the line when national publics are out protesting in the street, asking why their leaders are cutting budgets more, rather than trying to relaunch the economy?


Tensions Rise at EU Summit (Wall Street Journal 12/9/11)

France and Germany Push Deal

The fiscal union that German Chancellor Merkel has been pushing is a side show to the real game, but a necessary one.  It gives the ECB an excuse to act as a lender of last resort, to stop the market pressure on Italy and Spain and contagion to France.  It also keeps German voters and Merkel's own political coalition on her side.

But the real game is not just to stop the markets but also to  jump start growth.  And for this, the fiscal union as currently conceived is a disaster.  It focuses only on austerity, with radical deficit reduction as its cornerstone.  This will not solve the growth problem.  It will not end the eurozone crisis.  It will just substitute a growth crisis for the debt crisis, and push Europe and arguably the rest of the world into economic recession.


France Vows Powerful Summit Deal (Reuters 12/7/11)

US Officials Quietly Cajole European Leaders on Debt Crisis (Washington Post 12/7/11)

Merkel Warns Crisis Will Last

Merkel’s modus vivendi has always been to go slowly, to wear her opposition out, and to wait. This strategy, which enabled her to become Chancellor, will be her undoing.  The markets don’t wait.  Treaty reform and even the idea of deeper fiscal union are sideshows to the real event.  Unless Merkel agrees to the ECB becoming lender of last resort fast, the eurozone as a whole could suffer immeasurable damage.


Merkel Warns Solution to Europe's Crisis Will Take Years (Washington Post 12/2/11)