Image by Chesi - Fotos CC via FlickrWhat happened at the Sarkozy-Merkel Euro Summit?Very little, judging from the drop in stock markets and the Euro exchange rate the next morning, August 17. We'll see how the rest of week goes, but markets are manifesting their disappointment, no doubt about that, while the Swiss Franc keeps rising.
The media had also expected a lot from the meeting, announcing it as a "Euro Summit" because France and Germany are the two biggest economies in the Eurozone and have historically led forward the movement towards European Union.
Financial experts and investors, including big guys like Soros, had hoped for a lot more from the odd couple (Sarkozy and Merkel - their kisses deserve a post on its own). They had hoped for concrete proposals to save the Euro and in particular, the launching of Eurobonds backed by all 17 members of the Eurozone.
How could Eurobonds save the Euro?
They would be much like US Treasury bills. The Eurozone guarantee would help spread the burden among members, and be an obvious bonus for governments in trouble, foremost Greece, Portugal and Ireland, but also Spain and Italy. They would create a "firewall" against speculators, and overtime, secure the Euro's claim to become a world reserve currency. There had even been specific proposals: issue "blue eurobonds" backed by all member governments for a portion of the debt not exceeding 60% of GDP (in line with the Stability Pact that created the Euro) and allow governments to issue at their convenience "red bonds" to finance any debt above that, but without the backing of Eurozone members.
Unfortunately, the Eurobonds proposal, no matter how attractive, is frought with political and institutional uncertainties. Who would issue and manage them? How would national parliaments react? Germany, the best pupil in the class, has decidedly rejected so far the notion that it should pay for the more profligate and unruly members of the Eurozone ( because a Eurobond would mean that it would have to pay something in the form of a higher interest rate to finance its own debt). It has worked into its constitution the notion of a balanced budget and wants everybody else in Europe to do the same.
Results of the Euro Summit:
So what happened? Of course, we got no Eurobonds. Merkel said maybe in future one might consider them, but not for now. And we got a reaffirmation that the mechamisms presently in place to save the Euro are, in their opinion, quite sufficient as they are. In other words, no increase in the allocation of additional funds to save the Euro, no additinal responsibility to the European Central Bank.
So what did they propose? Three things: tax Euro financial transactions (Sarkozy's pet idea), get all Eurozone members to toe the line and balance their budgets (Merkel's pet idea) and create a mechanism for economic governance of the Eurozone. Under the chairmanship of EU President Van Rompuy, heads of governments are to meet twice a year and more if needed.
Of the three proposals, the last is the most important.
The harmonization of economic policies in the Eurozone may not sound like a sexy solution, but it is an essential, long-run one that could lay the basis for full integration. And it is rather clever to put it under the chairmanship of Van Rompuy who is both an excellent economist and an experienced negotiator. Moreover, from an institutional point of view, to force heads of government to meet means they have to prepare themselves for the meetings by pulling together all the best minds in their countries from the several ministries involved, in particular those dealing with finance and with economic policies, usually not the same ministries. This will enforce increased cohesion at the national level and ensure that "economic government" meetings become just that: economic government.
Yes, this also means "the end of the nation state", but that is the whole point of the unification of Europe, isn't it? A united Europe means the end of wars that have threatened not only the European continent but the whole of the civilized world. Because it is a lofty ideal, it is too often derided by people who seem to have either a hidden agenda or confused values, putting chauvinism above the love for peace. One Italian blogger defined it as a "return of European pride". And, as he pointed out, until the Eurozone has acquired an overseeing Ministry for Finance, it is impossible to launch the Eurobond proposal.
US Treasury Bills are America's best weapon to maintain its world economic and financial supremacy. The Eurozone cannot hope to achieve the same if it hasn't got the equivalent of the American Treasury.
To solve the Euro crisis requires the setting up of a Eurozone Treasury. That is the whole point of the Sarkozy-Merkel "economic government" proposal. Definitely a step forward!
Now will the rest of the Eurozone members agree? That is the whole question.
What do you think will happen? More dithering but a solution in the end? Or more dithering and Euro collapse, which, by the way, will cause a world-wide collapse. Don't kid yourself: a collapse of the Euro means a return to the 1930s and the Great Depression, worldwide!
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