Two heads, it is said, are better than one. In the case of the meeting between Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, the French president, that was not the case. If the conclusions give cover to a decision by the European Central Bank to intervene still more in public debt markets, it might offer some relief. But, like the Bourbons, the leaders seem to have learnt nothing and forgotten nothing.
What was agreed? The decisions seem to include: not compelling private bondholders to take losses on euro zone bail-outs, though voluntary restructuring remains possible; greater likelihood, though no automaticity, of sanctions on countries that fail to stay within the limits on budget deficits; inserting a balanced budget requirement into the domestic legislation of members; introduction of the European Stability Mechanism – the permanent rescue instrument – in June 2012, instead of June 2013; and monthly meetings of the European heads of state and governments, during the crisis, to oversee policy co-ordination.
Gone, then, is forced “private sector involvement” in rescheduling of debt, which will delight the ECB. Gone are automatic sanctions on fiscal “sinners” and review of breaches of fiscal rules by the European Court of Justice. This will delight France, which also obtained agreement that an intergovernmental accord among euro zone members might take the place of a new European Union treaty. Germany did not leave quite empty-handed: it managed to rule out “eurobonds” – joint issuance of sovereign debt – once again. But it does not seem to have got much.
Might this agreement encourage the ECB to intervene more heavily in markets for sovereign debt? Mario Draghi, its new president, told the European parliament last week that an agreement to bind governments on public finances would be “the most important element to start restoring credibility” with financial markets. “Other elements might follow, but the sequencing matters,” he added. The fiscal and reform measures announced by the technocratic government in Rome may help give the ECB the green light for those “other elements”. Markets have responded, in hope: Spain’s 10-year bonds were down to 5.2 per cent, and Italy’s to 6.3 per cent, on Monday. But Standard & Poor’s decided to put the euro zone on negative watch. Fragility remains the watchword.
The summit on Friday is a huge moment. What we have heard from Mr. Sarkozy and Ms. Merkel does not create confidence. The problem is that Germany – the euro zone’s hegemon – has a plan, but that plan is also something of a blunder. The good news is that euro zone opposition will prevent its full application. The bad news is that nothing better seems to be on offer.
The German faith is that fiscal malfeasance is the origin of the crisis. It has good reason to believe this. If it accepted the truth, it would have to admit that it played a large part in the unhappy outcome.
Take a look at the average fiscal deficits of 12 significant (or at least revealing) euro zone members from 1999 to 2007, inclusive. Every country, except Greece, fell below the famous 3 per cent of gross domestic product limit. Focusing on this criterion would have missed all today’s crisis-hit members, except Greece. Moreover, the four worst exemplars, after Greece, were Italy and then France, Germany and Austria. Meanwhile, Ireland, Estonia, Spain and Belgium had good performances over these years. After the crisis, the picture changed, with huge (and unexpected) deteriorations in the fiscal positions of Ireland, Portugal and Spain (though not Italy). In all, however, fiscal deficits were useless as indicators of looming crises.
