A busy day in Euroland

It’s been another busy day in the eurozone crisis, with European Council President Herman van Rompuy putting out his report on the prospects for treaty change and greater eurozone fiscal integration and then German Chancellor Angela Merkel and French President Nicolas Sarkozy sending a letter to Van Rompuy with their take on the issue. That’s just the formal announcements, not to mention the usual rumour mill of giant bailout funds, ECB and IMF intervention and a UK referendum.

To help digest this mass of info, we’ve picked out some of the key points from each text along with our thoughts on them.

Van Rompuy report:

- Need to enhance credibility of debt and deficit rules and ensure full compliance. Greater budgetary discipline to move euro area to true economic union. Commitment to balanced budgets.
- All introduced into national law – the ECJ would judge whether these rules had been correctly implemented.
- Two processes for achieving this: revise Protocol No 12 (in annex of treaty) or full treaty change with amendment to Article 48.
- Changing protocol 12, which relates to excessive deficit procedure, has the advantage of only requiring unanimous approval in the Council, therefore does not need national ratification and avoids triggering an Irish referendum.
- Amending article 48 would be a lengthy process but reforms could be much more far reaching including – automatic sanctions using EU institutions, specifically enhanced Commission oversight of budgets.
- Longer term move towards common debt issuance.
- Adhere to “well established IMF principles and practices” with regards to private sector involvement in future bailouts. Basically, rewrite the ESM treaty so that private sector losses are not encouraged. Also make most ESM decisions QMV.
- Allow ESM to recapitalise banks directly and have the “features of a credit institution”. This likely means that it should be able to borrow from the ECB.
- Review the clause which limits lending capacity of EFSF and ESM jointly – to allow them to run in parallel.

Merkel and Sarkozy letter:

- Commitment to push ahead with broad treaty changes although willingness to work with just 17 eurozone members.
- Regular eurozone summits (twice a year usually but once a month in the crisis). Focus on policies to foster growth, competitiveness and fiscal stability. “Ministerial Eurogroup” to prepare for meetings and enforce decisions.
- Framework of prevention using ECJ to ensure that fiscal rules are correctly transposed in national framework.
- Foster growth and competitiveness through eurozone convergence and integration on: financial regulation, labour markets, harmonisation of corporate tax base, introduction of eurozone FTT and more efficient use of European funds.
- Automatic sanctions for states which breach 3% deficit rule (can be reversed by QMV vote). Continuous failings will result in increasing interventions.
- Move forward ESM to 2012, rewrite clauses so it’s clear PSI in Greece was an exceptional occurrence. Decisions on ESM made by 85% QMV (based on ECB capital shares).

So, all in all a lot of words without saying much we didn’t already know. It is clear though that both documents line up fairly closely on many key issues. One area where they don’t agree, and where Merkel is apparently annoyed by Van Rompuy’s proposal, is the plan for the ESM and EFSF to run in tandem offering a boosted bailout fund.

Other things that caught our eye include: common corporate tax base - good luck getting Ireland to agree that, especially after all the austerity they have successfully introduced - and the plan for the eurozone FTT, which they seem determined to push ahead with, no matter how much havoc it would wreak on the European financial system.

In any case, as always, this doesn’t fill us with hope for the summit. If anything these plans are likely to be watered down through the negotiations, despite already looking relatively similar to the toothless stability and growth pact. Even if finalised in their current form the plans will only provide more austerity and take some time to implement. The (misguided) hope still remains that they will encourage the ECB to step up its bond buying – although if we were the ECB the commitment doesn’t seem large enough or credible enough for us to put our independence and principles on the line.