LONDON (MNI) – The deal for a new “fiscal compact” agreed by most
EU leaders at their summit earlier this month may have the best of
intentions behind it, but it is looking increasingly difficult to
implement effectively, according to analysts and policy-makers.
The governments of the 17 Eurozone members, along with those of
most other EU nations, pledged to implement tighter new rules on
deficits and debt, including the insertion of balanced budget clauses in
the constitution of each signatory state and supranational, EU-level
monitoring of national budgets even before they are approved
domestically.
The leaders also said they would collectively contribute E200
billion to bolster the resources of the International Monetary Fund,
which would in turn support Eurozone nations in trouble. And they
committed to accelerating the launch of the future E500 billion bailout
fund, the European Stability Mechanism.
But the absence of the UK from the proposed new agreement makes it
a non-EU document, which has created thorny legal problems because EU
law does not seem to allow for the use of EU institutions to monitor and
enforce rules established outside the EU’s institutional framework.
EU lawyers have been hard at work trying to find work-around
solutions to see how far the deal can be enacted and effective as an
inter-governmental agreement rather than a new EU treaty, and whether
the planned fiscal compact can be reconciled with the existing Lisbon
Treaty.
“It really is unclear how this will work out,” said a senior euro
area policy-maker, who is a veteran of EU economic agreements.
“We have very clever legal people working like hell to find a way
round this, but I don’t see great chances of overcoming these problems
to make a deal totally secure for the future” in the absence of EU
treaty changes, he said.
He added: “Maybe we’ll have to come up with something new.”
The initial negotiations on details and implementation have started
in Brussels. These talks included the UK, sitting in as an “observer,”
and representatives of the European Parliament. The European Council has
said it hopes a final version of the agreement can be finished by the
end of January and signed by EU leaders in early March. The Council
announced Tuesday that a summit has been planned for January 30.
A draft version of the proposed 14-article inter-governmental
agreement was circulated at the end of last week. It proposes invoking
an article in existing EU treaties to allow countries to take one
another at the European Court of Justice.
One member of European Parliament observing the initial
discussions, the Italian Socialist Roberto Gualtieri, stressed that the
process would take longer than had been envisaged.
Gualtieri told reporters in Brussels this week that “overlapping
rules and competences” would make the process harder. That sentiment was
echoed by the French MEP Sylvie Goulard, of the centrist ALDE block. The
centre-right German MEP Elmar Brok noted that many of the new proposals
already exist in recent, parallel agreements designed to tighten fiscal
harmonization, known as the “six-pack.”
Aside from the issue of whether the proposed surveillance and
enforcement can be undertaken by the EU institutions, several other
questions are also proving vexing. These include whether enshrining
strict fiscal rules in national law can really ensure that they are met.
The goal of countries striving for a structural budget deficit of
0.5% of GDP also looks very ambitious. Only four of the Eurozone
countries – Finland, Germany, Luxembourg and Italy — are currently
expected to achieve that by 2013, according to the European Commission’s
latest forecasts.
It is also not yet clear whether Finland will accept a proposed
loosening of the ESM unanimous voting rules, or whether exploratory
talks about increasing the ceiling on the EFSF-ESM from E500 billion
will run into opposition from countries like Germany, Netherlands,
Slovakia and Finland.
Speaking in the Bundestag earlier this week, German Chancellor
Angela Merkel failed to provide more clarity on her vision for fiscal
and political union or what the post-crisis euro-area economic
architecture might look like.
Janet Henry, chief European economist at HSBC, said that the deal
at the summit “contained modest steps in the right direction,” but she
added “there is no quick fix to the Eurozone sovereign crisis, which can
only be resolved over a period of many years.”
“We still believe it will require a more convincing roadmap
regarding closer integration and that it is hard to see how a much
bigger expansion of the ECB balance sheet can be avoided in the coming
weeks and months,” she said in a recent research report.
Indeed, the ECB on Wednesday made E489 billion worth of three-year
loans to banks at a borrowing cost fixed to the central bank’s main
refinancing rate, currently 1%. It was by far the largest single
refinancing operation, and with the longest maturity, the ECB has ever
conducted.
The announcement of such a huge infusion of cash into the Eurozone
banking system has already calmed nerves, allayed fears of an immediate
credit crunch, and pushed the euro higher. But it is unclear whether the
ECB’s mega-loan will have a similarly positive impact on the region’s
sovereign bond market, which is of great importance given that some E1.3
trillion worth of sovereign Eurozone debt must be refinanced in 2012.
Some analysts said the Eurozone sovereign debt crisis might become
less acute next year — not as a result of the agreements at the summit,
but rather because of structural reforms in EMU member states and,
possibly, additional actions by the ECB.
“The European Crisis is at an inflection point, but not a turning
point,” Stephen Jen, founding partner of SLJ Macro Partners said in a
report this week.
“The European Crisis will likely intensify in the coming months,
but the speed of the deterioration of the conditions could decelerate,”
he added. “With the Germans now in charge, it is much more likely that
the emphasis shifts to forcing the countries to persevere with reforms,
rather than designing new financial pyrotechnics to postpone the pain.”
Jen said that investors gain confidence from countries “doing the
right things that help shape their future competitiveness and fiscal
prudence,” rather than from massive money being thrown at the problem.
The euro area economy will likely fall into a deep recession next
year, partly due to the austerity measures and partly due to the banks’
deleveraging process, he added. It remains to be seen to what degree the
ECB’s liquidity largesse will help mitigate the deleveraging, which
involves both asset sales and tighter lending restrictions.
It also remains to be seen whether the European Banking Authority
might, as ECB President Mario Draghi hinted recently, refrain from
strict enforcement of new capital ratio rules that are exacerbating the
deleveraging process.
The recession itself might bring down bond yields, which are driven
to a large extent by the state of the economy. At the same time, as the
Eurozone economy contracts, inflation and the ECB’s policy rate should
fall, Mr. Jen said.
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