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Monday, December 05, 2011

Scoring today's Merkozy summit

Today's meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy is over and they have announced their proposal for treaty change and tackling the sovereign debt crisis in the eurozone. To give them credit its more substantial than we, and many others were expecting, with some clear agreement on key points. However, it is still an early stage - France and Germany need to gain the support of the other EU members at this week's summit.

In our view these are the key points (our reaction in bold):

- Automatic sanctions for eurozone countries running deficit above 3% of GDP. Only a qualified majority vote can block the sanctions. Merkel looks to have got her way on the automatic sanctions, although the QMV block does reduce the power to enforce them slightly, but most countries committed to austerity approach and Germany still wields substantial influence as largest guarantor.
Verdict: Merkel 2 - 0 Sarkozy

- Sarkozy said that the ECJ "will not be allowed to rule national budgets void", but will have the power to judge if the required fiscal rules (including the need for a 'golden rule' against persistent deficits) are being properly enforced by national law. Definitely a plus for Sarkozy, keeps hold of national sovereignty and keeps ECJ focused on legal not political matters. Also shifts focus towards intergovernmental procedures.
Verdict: Sarkozy 1 - 0 Merkel

- Permanent eurozone bailout fund will be brought forward to 2012, decisions on the ESM will be made by qualified majority. This move will help calm markets since it brings forward a significant amount of bailout money. Neither argued strongly for this in the run up, but had been considered by Merkel previously.
Verdict: Draw 1 - 1 (markets the real winner)

- Under the ESM no more losses for private bondholders (no more restructuring or private sector involvement clauses placed into ESM bailout agreements). Big and surprising win for Sarkozy. Had been touted in run up to meeting but slapped down by Germany before. Huge point for Germany previously when ESM was put together. Pledged to German electorate that private sector would take its fair share of pain under future bailouts. Merkel did hint she would consider a rule change last week, but never went as far as suggesting this was in the offing. Will have very positive impact for markets, hugely reduced likelihood of future losses, however, may be large political cost. From our perspective this may be a mistake, simply because the aversion to restructuring has not served the eurozone well so far. Ultimately, just recycling debt around the eurozone with no significant reduction, which many countries need, will not help in the long run.
Verdict: Sarkozy 2 - 0 Merkel (and markets again)

- Sarkozy said that France and Germany agree that "under no circumstances" can Eurobonds be considered a solution to the crisis. Expected, but Sakozy's openness to admitting that eurobonds won't come into force any time soon is a win for Merkel.
Verdict: Merkel 1 - 0 Sarkozy

- France and Germany will continue to abstain from making comments on how the ECB operates. Germany was keen to see this continue, although they didn't really stick to the agreement anyway so will make little difference. Keeping ECB out altogether is a plus for Merkel.
Verdict: Merkel 1 - 0 Sarkozy

- Eurozone heads of state and government will meet on a monthly basis until the crisis is sorted out. Sarkozy was keen to have this in place, although it was far from something which Merkel objected to. Does keep the intergovernmental slant which Sarkozy wanted.
Verdict: Sarkozy 1 - 0 Merkel

- To achieve all this, a new treaty is needed. The clear preference from both is for a Treaty change involving all 27 member states but a eurozone-only solution would be chosen if there is significant opposition from non-eurozone countries (read UK). The phrasing and focus here is a big win for Merkel. She's said all along that a eurozone only treaty is an option but not her first one. Statements here line up exactly with Merkel's earlier thinking. Does provide potential for UK negotiation although there is still a limit on how far Cameron can push his demands.
Verdict: Merkel 2 - 0 Sarkozy

Final Score: Merkel 7 - 5 Sarkozy

So, closer than many may have been expecting, but fair play to Sarkozy he managed to land a heavy blow in there with the removal of restructuring clauses from the ESM. The slant is surprisingly intergovernmental as Sarkozy would have wanted it to be, so another plus point for him there. But on the overall picture, we still have to say Merkel edges it, particularly with the focus on treaty change at 27.

All that said, this isn't a solution. Huge questions still remain over how countries will return to growth and competitiveness as well as how the divergent needs in terms of monetary policy and currency value will be overcome. We also suspect some of the positive market reaction will be from expectations that the ECB will step up its bond buying in response to these rules, but that is far from a given.


Poncho said...

Not likely to happen but, Germany is the one in the Eurozone that is upsetting the apple cart. It economy does not fit with any of the other countries. If the strong German economy was to leave the Euro then the rest might stand a chance.

Anonymous said...

I would like to see the end of this fiasco, and let everybody go back to what they had before, with there own currencies, and a fairer trade relationship, without all the rules being imposed by the EU,
Its doing nobody any good and costing to much in implementing the legislation, we need out, the sooner the better, but Idont hold my breath, time will tell and so will history.