The big news out of Europe on Friday was not S&P’s downgrade of 9 countries, France included. The ratings agency told us weeks ago that it might do this. No, much more important was the ECB’s saying in the bluntest possible terms that the EU leaders are backtracking on the fiscal compact agreed just 5 weeks ago by 26 of the 27 countries.
The Financial Times reports that ECB boardmember Jörg Asmussen has put pen to paper to accuse negotiators of “a substantial watering down” of the maximum debt pact.
Apparently he
wrote to negotiators that new provisions in the treaty that would allow highly indebted eurozone countries to breach budget deficit limits “in periods of severe economic downturn” amounted to an “escape clause” that could lead to “easy circumvention of the rule”.
“These revisions in my view clearly run against the spirit of the initial general agreement on an ambitious fiscal compact,” Mr Asmussen wrote in a letter on the ECB’s behalf, dated Thursday.
Mind you, this compact lacked credibility in the first place: it only focuses on austerity and ignores the need for troubled countries to adopt growth-stimulating measures, as well. So is the fact that it’s weaker now actually a good thing? Might looser shackles give Europe’s troubled economies, but especially the behemoths of Spain and Italy, the breathing room that they need to restart their troubled economies?
Sadly, no. Only the ECB can provide Spain and Italy with the oxygen being sucked away by the financial markets’ demands for ever higher compensation to hold Spanish and Italian debt. The only value of the fiscal compact in the current crisis — for it’s most truly a plan for preventing the next – is that it would have given the ECB the political cover needed to serve as a buyer of last resort for the Spanish and Italian paper. When it comes to how this new fiscal compact is perceived, the ECB is really the only audience that matters.
Will the ECB go on a buyer’s strike to make its point?
Remember, the ECB has so far bought €213.1 billion in troubled European bonds under its Securities Markets Programme. And it has shown before that it’s not afraid to use this as a weapon. We should keep a close eye on the ECB’s reaction to any eventual bond price falls due to the S&P downgrade.
Where does Germany stand on this?
Asmussen, the angry scribe, was previously Angela Merkel’s right hand man. Do his views reflect her own? Or is she happy enough with the symbolism of the compact exercise, as long as it deflects attention from the more thorny issue of today’s debt sustainability? Her statements over the next few days should give some clue.
Where do we go from here?
Now the folks responsible for the actual writing of this fiscal treaty have only two weeks before the next EU summit to come up with something that satisfies both the EU heads of state — whose attempts to soften the terms show that they are apparently having second thoughts about giving away fiscal sovereignty — and the ECB paymaster. They’ll need to be as flexible as Chinese acrobats to make it work.
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