European leaders reached an agreement over a “fiscal compact” which included stricter rules on budget deficits, considered the possibility of running the ESM and the EFSF together, and would allow for the possibility of Eurobonds in the longer-term, according to a draft summit communiqué released late on Thursday. Major points had been rejected by Germany and remained under discussion, according to reports.
As they scrambled to find some long-lasting solution to the underlying, fundamental problems flailing the Eurozone, Merkel, Sarkozy, and co. negotiated the terms of the next EU Summit communiqué on Thursday, according to Reuters.
Among the latest developments was an agreement over a “fiscal compact” based on stronger coordination of economic policy and greater consequences for those that break the rules. Within the options enumerated in the draft communiqué were a balanced budget amendment and the forcing of Eurozone members with budget deficits that exceed 3% of GDP to submit to a plan of structural reforms prepared by the EU Commission and Eurozone finance ministers.
Breaching the 3% deficit limit would also activate automatic sanctions, unless a certain majority of Eurozone finance ministers choose to let it slide. The draft also stipulated “more intrusive control of the national budgetary stance by the E.U., such as the ex ante approval of budgetary plans.” In other words, countries, already devoid of monetary sovereignty would begin to lose fiscal sovereignty.
Highly contentious, the draft stipulated several points that clearly go against Angela Merkel, and Germany’s, wishes; we could say it sounded rather French. According to the report, EU leaders were considering “common debt issuance” or Eurobonds, a position Merkel has strongly rejected.
The draft also delineated a possible framework for the Eurozone’s bailout mechanism. Leaders were considering moving the launch of the ESM forward to July 2012 and allowing the temporary EFSF to exist alongside the permanent facility, thus building up their joint firepower. The ESM would count with a €500 billion ($666.9 billion) lending capacity on the back of €80 billion ($106.7 billion) in paid-in capital and €620 billion ($827 billion) of callable capital.
More importantly, the draft stipulated that the ESM could be given a banking license, effectively granting it access to the ECB’s funds. Governments were pledging to keep the ESM’s paid-in capital to outstanding issuance ratio at 15%, meaning they were ready to capitalize the permanent bailout facility faster than previously expected.
There was also mention of funding fore the IMF. According to the report, the EU would be willing to provide up to €150 billion ($112.5 billion) in funds, while it expects the international community to raise another €50 billion ($66.7 billion), to capitalize an IMF lending facility to help solve the crisis.
Beyond rejecting joint debt issuance, Germany has been the one force pushing against greater ECB involvement in settling sovereign bond markets. On Thursday, ECB President Mario Draghi, an Italian citizen, announced the central bank was cutting its benchmark interest rate by 25 basis points to 1%, while adding that the ECB’s asset purchases were an extraordinary event and wouldn’t go on indefinitely. In other words, giving the ESM a bank license isn’t of Germany’s fancy.
Merkel is also opposed to the idea of having the ESM run parallel the EFSF, according to the reports. The tug-of-war between Merkel, Sarkozy, and the rest of the European policymakers will continue until the official communiqué is released. The European sovereign debt crisis has continuously escalated and has become a global phenomenon. U.S. banks like Citi, Morgan Stanley, and Bank of America tumbled on Draghi’s pessimistic comments, while gold and the euro tumbled in reaction to the news.(forbes.com)
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