Merkel and Sarkozy’s Letter to Van Rompuy laying out the Dec 5 Agreement

So I found the joint Franco-German press conference from December 5, at the website of the French Presidency (so in French) and confirmed (08:15 into the video) that the reporters did not misrepresent their statements. Merkel and Sarkozy had no idea of the changes to the SGP that they had voted on and already had already been reached the end of the European legislative process. However, between Monday and Wednesday they seem to have caught up with the error, according to my reading of the letter from Sarkozy and Merkel to Van Rompuy is out (zerohedge has a non-official translated copy).  So here’s what the letter proposes:

Reinforced Institutional Architecture

This is what I considered as mostly noise in the previous post. Then I stated that this was mostly a formalization of what has already been happening since the begining of 2010. There is already an ambiguous piece of news. The last point under this first heading mentions

un Eurogroupe ministériel et une structure préparatoire renforcée pour préparer et mettre en oeuvre les décisions prises par le Sommet et assurer le fonctionnement courant“.

Zero hedge translates this as

A ministerial Eurogroup and a reinforced preparatory structure to prepare and implement the decisions taken by the summit and ensuring the current functioning.

I agree with the translation, although I am left wondering what the “preparatory structure” is. It sounds like a temporary secretariat probably furnished by the Council, but I’m just guessing.

A Global Prevention Framework

There’s actually something new under this heading. There’s a considerable amount of talk but really the only part that matters is where they express a will that

“the adoption by each euro area member state of rules on a balanced budget translating the objectives and requirements of the Stability and Growth Pact into national legislation at constitutional or equivalent level. A new legal provison should set minimum requirements for the national rules on balanced budgets. The European Court of Justice, on request of the European Commission or a Euro area Member State, should have the possibility to verify the transposition in the national legislation.”

Although this is not a new proposal and I remember hearing German murmurs to that effect, I just checked the relevant documents and a constitutional provision  is not part of them.This would be new. However, the extent to which such a rule would bind is difficult to know. Such rules, even the German one, generally have time provisions and accept exceptions in case of economic recessions. This was not part of the original communique, but was later clarified during the Q&A session, when

After this they also demand a “common legal” framework in a number of areas, but it sounds like preaching to the choir to their electorates in terms of financial and labour market policies. Probably something for them to dismiss and for the UK to come home singing that it won.

A reinforced procedure to implement sound fiscal policies

This section is the one I mentioned in the introduction and that I criticised earlier. There’s a demand that

“as soon as a Member State is recognized to be in breach with the 3 % ceiling by the European Commission, there should be automatic consequences unless the Eurogroup, acting by qualified majority, decides otherwise.”

which is redundant because it is already in place.

However, if I am reading it correctly there’s a description of some of the conditions under which the member states could be allowed to pursue an excessive deficit. This would involve the agreement of a “European Reform Partnership” programme between the European Commission and the concerned member state. It would also involve an “intervention in the rights of that member state“. What this intervention would look like is unknown and unclear. Clearly, in line with Deauville, the Germans are probably looking for a loss of Council voting rights. This will probably not be agreed and they’ll be left with a loss of voting rights on the measures pertaining to the aid supplied to those countries, if such an aid is requested.

Finally there’s a reference to the anticipation of the ratification of the ESM treaty and a change in the decision making process, from unanimity to 85% qualified majority voting, consistent with what was reported by the press.

Conclusion: Different but not more credible

As I hope was clear in the description above, not much that matters is different. What is different does not matter, because the member states will not agree to constitutional balanced budget rules and if they do, they are likely to be lenient, and if they weren’t the political, social and popular backlash from enforcement would be too large to contain, in the absense of representative and overarching decision making reform. As to the voting rights, the same result will follow today that followed then. Member states will not abdicate their seat around the table.

Therefore the main decision of significance remains the anticipation of the ratification of the ESM treaty and the voting rule changes, both of which are significant and likely to take place.

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