Linking economy, nationalism and politics to the fate of the euro
Published:Friday | December 9, 2011 | 12:00 AM
Wilberne Persaud, Financial Gleaner op-ed columnist
"We want to make sure that the imbalances that led to the situation in the Eurozone today cannot happen again … we want a new treaty, to make clear to the peoples of Europe that things cannot continue as they are." These are indeed bold words from President Nicolas Sarkozy of France, speaking in Paris to the press after a meeting with German Chancellor Angela Merkel at France's ƒlysée Palace last Monday.
"We want to make sure that the imbalances that led to the situation in the Eurozone today cannot happen again … we want a new treaty, to make clear to the peoples of Europe that things cannot continue as they are." These are indeed bold words from President Nicolas Sarkozy of France, speaking in Paris to the press after a meeting with German Chancellor Angela Merkel at France's ƒlysée Palace last Monday.
With the financial crisis hovering like a tactically armed helicopter in distress over a globe, shrunken by liberalised financial flows and capital markets and with the euro currency at stake, the leaders of the two major economies of the European Union informed the world that they had crossed the forbidden hurdle of politics and nationalism.
Together they would endeavour to make the union more integrated, more like an economic and political federation. They would advocate for, and support amendments to European treaties with changes including central oversight of budgets and automatic sanctions against countries that violate stronger, agreed rules on deficits. Effectively, perhaps we should more correctly say intellectually, they crossed the Rubicon. National parliaments, should their proposal be ratified, shall be subject to obligatory and binding legal constraints on how much debt they can issue.
To reach this consensus, Chancellor Merkel and President Sarkozy had their own negotiation over how these proposed new measures would work - assuming ratification by the 17 Eurozone states and the other 10 that complete the membership. They hope all members shall adopt the treaty changes. Brussels, the European Court of Justice, and the European Central Bank shall all have roles to play in this new dispensation meant [optimistically] to take effect in less than two years.
Subject to sanction
Budgetary deficit limits of three per cent of gross domestic product [GDP] shall be legislated with countries breaching these limits subject to sanction. Members shall also endeavour, on a timely basis, to reduce their accumulated debt to 60 per cent of GDP.
Another important change in Germany's position is their abandonment of the idea that the permanent €500-billion emergency or 'bailout fund', the 'European Stability Mechanism', should include private-sector participation. Both France and the European Central Bank opposed this idea from the beginning. Undoubtedly, part of the reasoning behind this is the moral hazard it would clearly represent, as well as the cost to private-sector institutions, which no doubt balked at the idea.
But the actual mechanics are not the key issue here - it is whether 'markets' believe this overhaul will achieve the objective. Sarkozy thinks that to end up in disagreement is to 'risk the Eurozone exploding'. All said and done, what impact have these proposals had? Honestly, their impact could hardly be assessed because almost simultaneously Standard & Poor's placed 15 European countries on 'credit watch', predicated on their inability to achieve workable consensus in combating imminent threats to financial stability.
China rescue doesn't stand
Perhaps of more importance though, was news coming out of China. The New York Times reports China's vice-minister for foreign affairs, Fu Ying, saying the view "that China should rescue Europe does not stand, as reserves are not managed that way". Fu Ying maintained that the US$3.2 trillion in bonds, bills and cash held by the central bank as official reserves were accumulated savings, which could not be easily disbursed. "Foreign reserves are not domestic income or money that can be disposed of by the premier or finance minister. Foreign reserves is akin to savings, and their liquidity should be ensured," she said.
Additionally, the Chinese sovereign wealth fund manager suggested their investment could be in infrastructure and such like, not in European government bonds. The issue here is complicated. Timing of these comments should not be overlooked. China would love to be designated by Europe, a 'market economy'. This releases China exporters from the potential threat of anti-dumping rules against their exports to the EU.
Reports also suggest China would immediately view investment in European bonds as safe, should the German and French governments provide guarantees. But, as Mr Sarkozy insisted at his press conference, to consider euro bonds or collectivised European debt as a solution would be a 'strange idea'. How could Germany and France undertake to pay for the debt of others when, in effect, they would have no control over issuance of such debt?
What have we here? Potentially the embryo of a European Monetary Fund, a tentative approach of China in the uptake of European debt given the right quid pro quo; but then, if Germany were to guarantee such debt, private capital might conceivably rush in, wiping out the need to disturb China's robust piggy bank.