1. The EU, minus the U.K., announced at the Brussels summit that it would push forward with efforts to forge a closer economic union. They agreed to adopt a “new fiscal compact” that includes more stringent budget rules and nearly automatic penalties when those rules are broken. They also agreed to explore the closer coordination of national economic policies, to accelerate the formation of a permanent bailout fund and to send 200 billion euros to the International Monetary Fund so it can help finance remedies to the crisis.
Germany managed to quash any talk of any issuance of common debt by EU members, of allowing the ECB to assume a lender-of-last-resort role, and of other steps such as issuing the permanent bailout fund a banking license to help it combat the crisis.
European Central Bank President Mario Draghi has effectively been put in the hot seat by European Union leaders. But it’s unclear what untapped crisis-fighting options he’s able or even willing to consider.
Instead, the EU leaders have punted back to the ECB and appear to be counting on the central bank’s new leader, Mario Draghi, to save them.
Draghi has made it clear he intends to stick closely to both the letter and the spirit of the law that governs the ECB’s actions, so it’s not obvious what steps he will be willing or able to take beyond those he already has.
Those steps, which include lowering interest rates, easing collateral rules for banks and buying discreet quantities of government debt while making sure those purchases don’t increase the money supply, have done much to keep bond-market speculators from forcing a euro-zone nation to default. But it’s far from clear that after the most recent EU summit they will be enough to convince those speculators to give up their bully-boy tactics.
2. Dow Jones – The 17 countries of the euro zone formally agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly.
The new fiscal rules will have to operate as an intergovernmental agreement instead of being enforced through a treaty change, which would have required unanimous support. All EU member nations but the U.K. indicated they may join the euro-zone fiscal agreement, although some will have to consult their parliaments.
The 27 governments also agreed that they would move to raise up to EUR200 billion for the International Monetary Fund that could be used for lending to euro-zone governments. The details of this arrangement will be fixed in the coming weeks, including how much, if any of the funding would be earmarked for the euro zone.
But the governments couldn’t agree to raise the EUR500 billion cap on the euro zone’s bailout lending capacity. Germany remains staunchly against the idea, which could ensure up to EUR700 billion in lending for Italy, Spain and recapitalizing euro-zone banks. The governments agreed to discuss the proposal again in March.
The governments hope steps taken by the ECB Thursday to provide longer-term loans to banks will in turn help troubled governments finance their debts.
“Thanks to the decisions of the central bank, the Italian government could ask Italian banks to finance part of its debt at rates that are incontestably less high than the market rates today,” French President Nicolas Sarkozy said early Friday morning.
The ECB’s new program will allow banks to borrow long term at 1% rates, leaving plenty of room for them to buy Italian debt at rates below the current market yields over 6%, he said.
The new intergovernmental agreement will set automatic penalties for countries that violate the EU’s government deficit limit of 3% of gross domestic product and total debt limit of 60% of GDP.
The new agreement would also require national governments to enshrine the “Golden Rule” — a prohibition on governments running “structural deficits” above 0.5% of gross domestic product — into national constitutions or equivalent national legal systems. The European Court of Justice will have the power to enforce national governments’ adherence to the rule.
European Council President Herman van Rompuy said that as many as 26 of the 27 EU member states could approve the deal.
“I know it’s going to be very close to 27, in fact 26 leaders are in favor of joining this effort, they recognize the euro is a common good,” Van Rompuy said, adding the aim is to ratify the treaty on the European Stability Mechanism, the bloc’s permanent bailout mechanism, by mid-2012.
A number of non euro-zone governments, including Hungary, Sweden and the Czech Republic, will discuss the pact with their parliaments before signing on.
U.K. Prime Minister David Cameron said Friday that the U.K. won’t agree to the creation of a new EU treaty because of concerns, among others, that the deal would limit the government’s discretion over financial regulation.
Van Rompuy opened the door to future expansion of the EU, following Croatia’s signature of an accession treaty earlier Friday.
The Eurozone fracture is being built into today’s deal: rather than find something acceptable to all 27 members of the European Union, the deal being done is getting negotiated only between the 17 members of the Euro zone. Where does that leave EU members like Britain which don’t use the euro? Out in the cold, with no leverage. If the UK doesn’t want to help save the euro — and, by all accounts, it doesn’t — then that in and of itself makes the task much more difficult.
Don’t think that Europe’s banks might be able to step in and lend their governments the money they need, either. The European Banking Authority, with exquisite timing, informed the world on Thursday that the continent’s banks need to raise €115 billion in new capital, including more than €15 billion for Spain’s Banco Santander alone. Where are they going to find that kind of scratch? Certainly not from their beleaguered governments. And there aren’t many private investors clamoring to invest in this particular train-wreck, either.
5. In one of the gloomiest predictions about the fallout from a breakup of the euro, Citigroup’s chief economist on Thursday warned a collapse of the currency will result in years of a global depression that could send unemployment spiking above 20% in the West.
The disaster, he said, would send GDP plummeting more than 10% and unemployment in the West surging to 20% or more. “If Spain and Italy were to exit, there would be a collapse of systemically important financial institutions throughout the European Union and North America and years of global depression,” Buiter wrote.
Buiter sees little chance of these worst-case scenarios actually coming to fruition. He forecasts a 5% or lower chance of a disorderly default and exit by all five periphery states.
Likewise, Buiter believes the likelihood of an exit by Germany and other fiscally strong countries is even less likely, attributing a less than 3% probability of such an event. That’s a good thing because he believes this outcome would perhaps be even more disastrous and extremely messy from a legal standpoint.
6. Euro-area governments have to repay more than 1.1 trillion euros of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. European banks have about $665 billion of debt coming due in the first six months, according to Citigroup Inc., based on Dealogic data.
Holger Schmieding, chief European economist at Berenberg Bank in London, said the “avalanche” of refinancing needs in the next two months means the crisis could worsen and “the ECB would then finally be forced to step up its anti-crisis response to save the euro and itself.”
Given his view that the ECB is unlikely to drive yields much lower or cap them, Citigroup economist Juergen Michels said he expects a “deep euro-area recession and strained financial markets” in 2012 with the region’s economy contracting every quarter.
Another test will be the response of credit-ratings agencies. Standard & Poor’s, which this week put Germany, France and 13 other euro-area nations on review for a downgrade, said it will study the summit implications and “impact on the growing systemic stresses we identified.” While a “unified stance” could prompt delay, rating cuts remain possible within the next three months, said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt.