So France and Germany reached what was hailed as yet another “comprehensive agreement” on the reform of the Eurozone fiscal policies.
In my opinion this wasn’t that comprehensive an agreement. It was only the last of such several steps since the beginning of this dialogue over a year ago. Actually only half of the conclusions are news. I believe that the setting is prepared for the ECB to intervene in the markets. In my opinion, anyone who starts buying cheap Portuguese, Irish, Spanish and Italian Bonds is likely to make a killing either when they mature or selling them when the market picks up.
France and Germany have agreed on a lot of measures, over several meetings. Most of the agreements have been to wait and see (mostly because they couldn’t agree on what to do), others have been agreements to bailout poor neighbours (Greece, Ireland and Portugal) , and other yet have been agreements to threaten (Greece) or support (Italy) neighbours. However there were policy agreements, such as the “Deauville Agreement”, which never really came to fruition, or such as the “Pact for Competitiveness” that led to the Euro Plus Pact, which matured into a non-credible commitment. Therefore, the latest in Franco-German agreements, as the latest patch to be added to the European Integration patchwork deserves some careful consideration, particularly in light of the ECB’s fiscal reform conditions for wider monetary intervention.
The “Comprehensive Franco-German Agreement” of December 5, 2011
Several points of agreement about the future of European fiscal policy were highlighted during the join press conference, yesterday. The FT’s brussels blog has a brief summary of the measures (@15:45). Reuters and Bloomberg discuss this at greater length. There seem to be 6 conclusions that the media have decided to highlight. 3 are noise and 3 are news.
- The Stability and Growth Pact (SGP) is to gain more teeth. The Germans seem to have altogether dropped demands for automatic punitive action to be taken at the preventative stage in order to get the French to accept them at the corrective stage. But wait, haven’t we heard this before, a year ago, as part of the Deauville agreement, under the acronym of “SGP3”? We have (see also here and here), but the media reports (see links above) would have you believe otherwise. Actually, at the time there was a rich and large debate of this issue (see here for my own views). This is the definition of a non-issue. SGP reform is so much more advanced than the press would have you believe that it has already been legislated upon by the Council and the European Parliament. The fact that Sarkozy and Merkel mentioned it and that the press repeated it so uncritically is an indictment of politicians and journalists.
- Routine monthly meetings are to take place between Euro-zone leaders for as long as the crisis continues. This already happens out of necessity, so they have just agreed on scheduling it.
- They reiterated their positions that jointly guaranteed Eurobonds are not on the table.
- The ESM is to become a reality a year earlier than expected, being anticipated to July 2012 from July 2013.
- Majority of decision of the ESM (signed version here) should be taken through qualified majority voting (QMV), with motions carried with 85% of votes. It’s important to remember that votes are allocated proportionally to capital contributions, not equally among member states. Given that the treaty was signed back in July, some amendments will have to be made to it, before it is sent to the national governments for ratification.
- France and Germany are happy to drop a private sector bail-in (aka PSI) for all other bail out programmes, thus not extending the demands made of Greece on July 21, to the other member states.
Is it enough for the markets?
As the charts below show, the agreement cheered up the markets. The majority of yields fell, characteristically of an increase in demand, only to be followed by a rise, due to S&P’s warnings. Interestingly though, Countries already bailed out, such as Portugal and Ireland do not seem to have been as affected as others, which is understanding. Greece, who is still subjected to a private sector bail-in, as per the July 21 agreement, did not benefit from this agreement. I would direct you towards Zero Hedge for further insights into the effect these announcements have had on the financial and commodities markets. The long-term picture is not very positive though.
Clearly this seems to have sounded like good news for the markets, even if for a short time. But they weren’t buoyant about it. It wasn’t the bazooka they’ve been asking for. Clearly there was no announcement of a wide ranging EFSF intervention in financial markets in order to lower yields because the crisis is too large for the EFSF to do the trick without jeopardising it AAA rating and that of its contributors.
Is it enough for the ECB?
The question, however, is whether the ECB will consider these steps to be far reaching enough for it to feel at ease intervening in the market. It is difficult to assess this, but clearly we are a step closer to this than we were yesterday in the morning, despite warnings by Nowotny.
I would focus on the information that is new rather than on the SGP. The speeding up of the implementation of the ESM treaty matters, as I said before. The end to PSI was also one of the demands of the ECB (although probably not a constitutional one). I think that the ECB really would prefer to have a single fiscal interlocutor with decision powers, rather than the EC and the 17 Euro-zone member states, but I assume that as everyone else, it expects the present intergovernmental solution to be sufficient for the time being.
It’ll be interesting to see what the Governing Council of the ECB does and what its president says on Thursday. I don’t expect much from it as I believe any change will occur as a result of the Council meeting on Friday, but I’m going to be paying attention to any subtle message they might be trying to send to their fiscal counter-parts. Depending on the result, the ECB might articulate some message over the weekend or wait until its next scheduled meeting on on December 22 (see here for the relevant calendar).
These efforts come at what is probably the end of the EU intergovernmental reform stage in a broader move towards fiscal federalism. The advantage is that none of them have so far required changes to the treaties that change the relationships of institutions to the extent that the decisions much be ratified parliamentary or through referenda. This makes things easier. As I said at the beginning, I would recommend that you start buying sovereign bonds. Although they’ve been successfully managed for a while, it seems to me as though there’s a good chance that they’ll be guaranteed by the ECB from now onwards.