A new “fiscal union” treaty engineered by Germany to confront the euro crisis came with historic overtones last week. But whether the deal can staunch the immediate crisis facing Italy, Greece, and Spain is unclear as this week a slightly sour mood settled over the Continent.
Governments including Ireland, Sweden, Hungary, the Czech Republic, Finland, and The Netherlands face questions about ceding budgetary sovereignty to the European Union. It is a week so far of strikes over austerity, lackluster growth forecasts, doubts about German Commerzbank, and a continued flirting by Italy with a prohibitive 7 percent borrowing rate figure for both five- and 10-year bonds. The euro today dropped to a near-one-year low on fears of ongoing instability, while London's FTSE-100 index lost more than 2 percent and France's CAC-40 index fell more than 3 percent.
"A lot of the excitement over the treaty has given way to other realities setting in … we are now in an ‘Oh, but…’ moment,” says Sony Kapoor of the Brussels think tank Re-Define. “[European leaders] had nothing to say about growth, and we are still staring at a deep recession that will worsen the debt crisis.”
As Europe’s third-largest economy, Italy faces huge ($220 billion) debt repayments by March and popular anger over austerity. New Prime Minister Mario Monti vows a new budget will quiet markets. (This week, Italy’s 950 members of parliament, whose salaries are double that of their German and British counterparts, debated pay cuts.)
French officials continue to brace for a possible loss of the nation’s AAA rating, even as Fitch Ratings forecast a “significant” downturn in the eurozone and Moody’s put eight Spanish banks on review for a downgrade.
French Socialist presidential candidate François Hollande says the fiscal union concept agreed to last Friday by 26 EU members – Britain did not join in – to tighten fiscal discipline, lacks a significant growth component, and vowed to renegotiate it if elected next spring.
Last Friday’s treaty was hailed as a kind of landmark and a triumph for German Chancellor Angela Merkel. The deal represents a greater institutional effort to force budgetary oversight on eurozone members to hew to targets agreed to years ago in the Maastricht Treaty, a founding treaty of the European Union, impose sanctions on violators, and mend complex institutional flaws. A permanent “stability fund” to be capped at €500 billion will come online a year early. The new treaty rules essentially create “more Europe” as Ms. Merkel puts it, albeit a more German-influenced Europe, and will theoretically avert new crises.
Yet whether European leaders have thwarted the immediate crisis on their doorstep is the question.
The Dec. 9 summit was only the most recent in two years of summits that have been criticized as offering too little and too late, creating uncertainty about Europe's resolve in markets and causing frenzied attacks on Irish and Portuguese bonds that eventually forced those countries into bailouts. The crisis was spawned by a huge Greek debt first revealed in December 2009.
Holiday season tempers aggressive action
December has always been a slower month in Europe, with many executives hitting the ski slopes, and the holiday season has often acted as its own kind of "firewall" from aggressive market action.
But markets will gear up again next January. An editorial in Germany’s Spiegel newsmagazine this week suggested that markets “are only interested in the question of how the firepower of the euro backstop fund can be boosted and what role the European Central Bank will play in combating the crisis. On this front, European leaders have made little progress.”
Already, whether an estimated €200 billion agreed to in the treaty summit to help prevent an Italian or Spanish default can be funneled through the International Monetary Fund is unclear, with Czech and German officials balking and US and Japanese officials questioning the approach of using the IMF for such dedicated funds, according to the news site EUobserver.com.
Different views of what it means to be European
As the euro crisis has unfolded it has also deepened a long running existential question over what it means to be European, and what model the EU will run under.
France and southern European nations want more economic integration and pooling of resources, especially through the European Central Bank; Germany and northern Europeans are inclined to agree, but only after spendthrift peripheral countries bring their affairs in order.
Some call it a multi-speed Europe, others a multi-tier Europe. French President Nicolas Sarkozy said in an interview published Monday that “there are now clearly two Europes. One wants more solidarity among its members, and more regulation. The other is fixed only to the logic of the single market.”
How the treaty veto by British Prime Minister David Cameron that essentially isolates Britain will affect market dynamics, not to mention dynamics within his own governing coalition with the Liberal Democrats, remains unclear. Mr. Cameron wanted opt-outs for transaction fees that would affect London’s financial services industry. On Tuesday, European Commission President Jose Manuel Barroso said Mr. Cameron’s demands violated single market and EU rules and “made compromise impossible.”
It will still take four months or more for any new EU treaty to be approved. Referendums in some countries and parliamentary approval in others could still change the ultimate list of signatories as questions about sovereignty over taxing and spending powers are debated. The rules for the 26 EU nations and those for the 17-member eurozone require further clarification.
“Right now, there is not much more than a blank sheet of paper and even the name of the future treaty might still change,” said Petr Necas, the prime minister of the Czech Republic, quoted in the Financial Times today. “I think that it would be politically short-sighted to come out with strong statements that we should sign that piece of paper.”
“This agreement will no doubt be questioned in the coming weeks, both in terms of whether all of the countries will actually pass the necessary legislation [and in some cases potentially win a referendum] and also whether it is truly enforceable,” an HSBC research note said.
Andrés Cala contributed to this report from Madrid, Spain.