December 02, 2011

Franco-German Push for Budget Policing Meets Resistance

Germany and France are pushing for closer economic ties among euro nations and tougher enforcement of budget rules to counter the debt crisis, snubbing investor pleas to back an expanded European Central Bank role.
German Chancellor Angela Merkel, who will use a speech to lawmakers in Berlin today to outline her stance before a Dec. 9 European Union summit, has repeated her push to rework EU rules to lock in budget monitoring and seal off the ECB from political pressure. French President Nicolas Sarkozy late yesterday called for “more discipline” and automatic penalties for nations that break fiscal rules.
Merkel’s refusal to deploy the ECB is a rebuff to President Barack Obama after he exhorted Europe’s leaders to take more action to combat the crisis. The chancellor is loath to agree to follow the Federal Reserve and the Bank of England in policies she views as akin to fighting debt with more debt. Enlisting the ECB in battling the crisis would violate the central bank’s independence and set it on a course of action that might not work, destroying its credibility.
“The market is questioning Merkel’s tough approach,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in a telephone interview. Investors want “clarity on what the framework will look like and what the financial bridge will look like” to fund euro-area governments and banks that need aid while fiscal ties are negotiated, he said.

‘A Lot of Time’

EU President Herman Van Rompuy has questioned imposing policy through a treaty, saying the process doesn’t move quickly enough to satisfy markets. “It can take a lot of time,” he said late yesterday in Brussels. “We are looking for something that can be handled much quicker” to restore investor confidence.
Throughout almost two years of market turbulence and conflict with allies, Merkel hasn’t budged, rejecting joint euro bonds and a greater ECB role, at times clashing with Sarkozy.
Merkel will travel to Paris on Dec. 5 as the two leaders prepare the proposed overhaul of European institutions. It’s a required step before considering more aggressive measures, she says. “You can’t put the cart before the horse,” Merkel said on Nov. 23.
In his last night speech in Toulon, France, Sarkozy said the 17-nation euro area, bound by a currency introduced a decade ago and intended to be permanent, risks “exploding” if members fail to converge economically.

Sarkozy’s Convergence

The countries sharing the currency must prepare their budgets in common, narrow competitiveness gaps and face tougher automatic penalties for fiscal rule-breaking, Sarkozy said.
“There can’t be a single currency without economies heading toward more convergence,” Sarkozy told 5,000 supporters in a 50-minute speech in the Mediterranean port. “If living standards, productivity, and competitiveness gaps widen among euro-zone countries, the euro will sooner rather than later be too strong for some and too weak for others, and the euro zone will explode.”
ECB President Mario Draghi signaled yesterday that the central bank could do more to fight the crisis in return for closer fiscal union.
“The sequencing matters,” Draghi told the European Parliament in Brussels. “It is first and foremost important to get a commonly shared fiscal compact right.”

‘More Strictly’

Germany is seeking changes to the EU’s rulebook to allow closer monitoring of euro countries’ budgets, with sanctions against persistent offenders and potential veto power over national spending plans wielded by the EU Commission, the EU’s Brussels-based executive. Van Rompuy is due to present proposals for treaty change at the Dec. 9 summit.
Merkel, who has signaled she doesn’t want financial markets or even her own economic advisers imposing solutions for the debt crisis, is sticking to the crisis-fighting arsenal built up since Greece, the euro area’s most-indebted country, was bailed out in May 2010. Six months later, as Ireland prepared to join Greece in requesting a rescue, Merkel said policy makers have to assert “primacy” over the markets in “a kind of battle.”
Germany and Europe don’t have “unlimited financial strength” to counter the crisis, Merkel’s chief spokesman, Steffen Seibert, told reporters Nov. 28. That’s “why the German government reacts so skeptically to the many calls for Europe to finally free up the really big, final financial reserves, which the Anglo-Saxon world likes to call showing the bazooka.”

IMF Role

In the latest bid to tame the crisis, European finance ministers said this week they would seek a greater role for the International Monetary Fund alongside their own bailout fund, the European Financial Stability Facility.
German Finance Minister Wolfgang Schaeuble said the IMF option, along with the EFSF’s ability to buy sovereign bonds and guarantee as much as 30 percent of bond issues by troubled governments, guarantees that all euro-area members will meet their financing needs well beyond the first quarter of 2012.
The EFSF looks like “yesterday’s story” as German policy makers play a “huge game of chicken” over future economic and monetary union to achieve their budget-tightening aims, saidJim O’Neill, chairman of Goldman Sachs Asset Management.
“How close to the edge do you want to take this?” O’Neill said in a Bloomberg Television interview with Francine Lacqua. “It needs Germany and the ECB to decide whether they want EMU to exist or not, because that’s how it’s going.”

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