The 17 countries of the Eurozone formally backed a new deal for fiscal management, one designed to “save the euro” but which can only help if a host of other measures fall into place, including any plan to actually boost growth on the southern periphery.
The European Council released this communique on the agreement. Because of the British veto, the countries could not sign the agreement as part of the Treaty of Lisbon. Instead, they will have to put together an international compact on fiscal matters. From the release:
At a press conference Herman Van Rompuy, President of the European Council, and José Manuel Barroso, President of the European Commission, explained the short-term measures. Up to €200 billion will be made available to the IMF, the European Financial Stability Facility (EFSF) leverage “will be rapidly deployed” and the European Stability Mechanism (ESM) should enter into force in July 2012.
For the medium and longer term, the 17 eurozone countries will conclude an international agreement. This fiscal compact, to be signed no later than March 2012, will establish a new, stronger fiscal rule, including more automatism in the excessive deficit procedure. The objective remains to incorporate these provisions into the treaties of the Union as soon as possible. The Heads of State or Government of Bulgaria, Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania and Sweden indicated the possibility to take part in this process after consulting their Parliaments where appropriate.
More in this PDF. Note that the Czech Republic, Hungary and Sweden went along with the final agreement, after voting with Britain initially. So only Britain opted out of the arrangement, and as a result the EU may fall in a bid to save the Eurozone.
Twenty years after the Maastricht Treaty, which was designed not just to integrate Europe but to contain the might of a united Germany, Berlin had effectively united Europe under its control, with Britain all but shut out.
Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment.
The key to all this working is two-fold. One: the enforcement mechanism. According to the draft, “The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation. It will be defined by each Member State on the basis of principles proposed by the Commission. We recognise the jurisdiction of the Court of Justice to verify the transposition of this rule at national level.” But it’s unclear how that will actually manage itself, as budget percentages are often subjective.
More important is the question of growth. The communique says they are “working” toward a common economic policy. There’s no sense of what that is, beyond tight fiscal discipline. A German-style budgetary and monetary authority works for Germany, mainly because they have a cheaper euro than they should thanks to their partners. But it’s unlikely to work for the periphery, especially after austerity measures – in the midst of a recession – get put into place. Capital flows and current accounts require a rebalancing. There are only hand-waves toward that.
Felix Salmon called the summit “disastrous,” for a host of other reasons, mainly the fact that the immediate problem has not been fixed.
The fundamental problem is that there isn’t enough money to go around. The current bailout fund, the European Financial Stability Facility, is barely big enough to cope with Greece; it doesn’t have a chance of being able to bail out a big economy like Italy or Spain. So it needs to beef up: it needs to be able to borrow money from the one entity which is actually capable of printing money, the European Central Bank.
But the ECB’s president, Mario Draghi, has made it clear that’s not going to happen. Draghi is nominally Italian but in reality one of the stateless European technocratic elite: a former vice chairman and managing director of Goldman Sachs, he’s perfectly comfortable delivering Italy the bad news that he’s not going to lend her the money she needs. He’s very reluctant to lend it directly, he won’t lend it to the EFSF, and he won’t lend it to the IMF. Draghi has his instructions, and he’s sticking to them — even if doing so means the end of the euro zone as we know it.
And there’s more bad news, too. All of Europe’s hopes right now are being placed in something called the European Stability Mechanism — a permanent successor to the temporary EFSF. Since it’s permanent, the ESM is going to have to be constructed with the ability to put out fires of any conceivable size. And as such, it’s going to have to be able to borrow enormous amounts of money, and lend them on to countries which have found themselves in trouble.
But that would make the ESM, essentially, a bank. And the European leaders seem determined, today, to prevent the ESM from operating as a bank at all. Which means it will never get the firepower it needs to be taken seriously.
It’s been said that there were ten days to save the Eurozone. This is the tenth day. Whether the summit did enough to allow the Eurozone to survive will be left to history.