My initial take on the deal is that it will be sufficient to dampen the acute phase of the crisis, but that the absence of a clear long-term strategy for growth means that there could still be a long period of chronic problems ahead.
As ever, though, there’s a gap between rhetoric and reality in the summit announcements, which may make such a conclusion premature.
And while the UK’s approach has gotten the headlines and will mark a turning point in its relations with Europe, it was never going to determine whether the eurozone will survive. It was ham-fisted diplomacy but shouldn’t have been surprising to anyone
who knows anything about UK politics who watched Wednesday’s Prime Minister’s Questions.
The new political (the “fiscal compact”) and funding arrangements are what matter, along with the response of the ECB.
The fiscal compact has some worthy long-term goals but won’t in itself be able to solve the eurozone’s balance of payments problems, and it also introduces a new round of political risk into the first half of 2012. It’s also unclear whether the European Commission has the requisite authority to provide institutional support to the compact — though Brussels remains supremely gifted at legal pragmatism, if nothing else.
In short, it’s unclear whether (1) the deal has enough power to change states’ behaviour (a problem worsened by the fact it’ll take time that the eurozone doesn’t have to show how the rules work), and (2) it can escape unscathed from the small country electoral gauntlet it’s about to run.
On (1), here is Goldman Sachs’ take (emphasis ours)…
… the fiscal rules (or ‘fiscal compact’) do not go beyond what we expected. ECB President Draghi has highlighted that such rules are required before any other policy actions might follow. The ‘ex ante’ component – which Draghi emphasised as key – consists of reporting debt issuance plans. That seems to use to be relatively weak as a fiscal rule. Further measures may follow and more details will need to be worked out today. Debt rules will also apply in each country, with the European Court of Justice verifying that they are enacted at the national level. But that falls short of monitoring on an ongoing basis.
… and Citi’s (emphasis also ours):
However, the available decisions do not expand on the form of sanctions and to us it remains very unclear how these sanctions can be enforced. As the fiscal compact – mainly because of UK opposition – will not be part of the EU Treaty and will be only an “international agreement”, it remains uncertain whether the EU Commission or the ECJ will have the rights to enforce these measures. In case the Commission is able to enforce the measure and has the right to take away national sovereignty for the 17 euro area member states, the agreement might require a referendum in some member states, e.g. Ireland. The other open question is how national constitutional courts (e.g. Germany) will regard this agreement.
The rules don’t do anything to encourage the surplus countries to spend more as a way of aiding the underlying balance of payments crisis.
However, the “automatic” penalities for breaking fiscal “rules” will apply “unless a qualified majority of euro area Member States is opposed”, the statement says. A Goldman note from earlier in the week explains that this leaves the big countries with a lot (or a lot of small countries) the power to ensure penalties are imposed:
A qualified majority vote does also require that at least half of the countries are in favour. For the Eurozone specifically this means a minimum of 9 countries have to approve, collecting at least 73.9% of the voting rights. There is even a third requirement: that the countries voting in favour represent 62% of the Eurozone population
It is clear that a number of small countries can quite easily block a QM vote. Here is the most extreme theoretical example: If the 9 smallest countries vote against a motion, a Qualified Majority cannot be reached by the remaining 8 countries. However, the 9 smallest countries collectively represent only 50 of 213 QM votes, and only 7.5% of the overall Eurozone GDP.
So it may appear that small countries carry disproportionate weight. But large countries also enjoy special protection. Given the 73.9% majority rule, any group of countries combining 56 votes or more out of 213 can block a QM. Germany and France together have 58. Looking at a group of fiscally stronger countries in the Eurozone, like Germany, Netherlands, Finland and Austria also represent a blocking minority with 59 votes.
The reality of QM voting in Europe is that individual country’s interests are relatively strongly protected. For small and large countries it is relatively easy to build coalitions that can block a Qualified Majority.
Only time will tell though how automatic the automaticity is.
And it’s more of the same austerity for the deficit countries, which won’t help in the short-term. Indeed, Europe is still asking Greece to experience an enormous amount of pain for an unspecified amount of time. A fiscal union this is not.
On (2), here’s an excerpt from a Eurasia Group note published Friday:
… a new round of ratifications will now take place across the member states in the first half of 2012: in the first instance to sign off the ESM treaty, and in the second instance, for the intergovernmental agreement after the March European Council, once final consensus on the substance to be included in the new framework has been achieved. With the latter also comes the risk of referendums in Ireland, and potentially elsewhere, although this will ultimately depend on exactly what is in the agreement and the extent to which it is determined to be a meaningful transfer of sovereignty. There is also a risk that the new bilateral member state loans (via national central banks) to the IMF may not equate to EUR 200 billion, and that it may take longer to reach agreement than the ten days specified in yesterday’s communique.
In other words, the Finnish Parliament, the German Constitutional Court and the Irish people, at least, may yet have their say. Admittedly, the summit statement is designed to overcome the pesky Finns, since the ESM requires the agreement of member states representing 90 per cent of the ESM’s committed capital. But even so, it’s not going to be an easy ride.
Then there’s the gap between the stated funding for the EFSF, ESM and IMF, and the reality. The statement refers to a €500bn ($670bn) “ceiling” on the combined EFSF and ESM, but the same old problems about the former’s credibility remain. Wire reports, echoed in Sarkozy’s comments after the summit concluded on Friday morning, suggest that the ESM may be able to borrow from the ECB. This would be an important change but it would still be dependent on the ECB’s willingness to allow it to borrow. The IMF agreement is good news but the €200bn lacks (any) detail. Moreover, the summit note that “We are looking forward to parallel contributions from the international community” is sadly unspecific.
All told, we remain, as ever, sceptical. This wasn’t a complete failure but it certainly wasn’t success.
Fortunately, it doesn’t matter what we think. It matters what Mario Draghi thinks, and thus far he’s sounded cautiously optimistic.
Which is always a dangerous attitude in Europe.
Statement by the euro area heads – Europa
The only way to save the eurozone is to destroy the EU – Wolfgang Munchau
Quotes du jour – Eurofudge edition – FT Alphaville