Europe's leaders have convened another summit meeting that will, they promise, put all the break-up speculation to bed once and for all. But the ideas that were floated pre-meeting are, um, logically challenged. Consider this excerpt from a recent Wall Street Journal article:
...Perhaps the markets are simply relieved that the two leaders have come to any agreement at all, given how far apart they have been throughout the crisis on key political questions. Of the two, Mrs. Merkel has given the most ground. Both sides have agreed to toughen the euro zone's fiscal rules with automatic fines for transgressors. But Berlin had wanted the rules to be policed by a supra-national body such as the European Commission or the European Court of Justice. Instead, Mr. Sarkozy has prevailed: Responsibility for maintaining discipline will remain with member states, each of which will be required to incorporate debt brakes into their constitutions. The ECJ's role will be limited to ruling whether so-called Golden Rules comply with the European Treaty, while any sanctions will remain the responsibility of the European Council, voting by qualified majority.
Whether this will be enough to persuade the ECB to act depends partly on whether the ECB considers the euro zone's financial situation to be so desperate that it is willing to overlook the clear flaws in this plan. After all, the new fiscal-discipline framework isn't so very different from the old stability and growth pact that proved so disastrously ineffective. The ECB might question whether it reduces moral hazard since national parliaments will still have the final say on budgets. There is no mechanism to force states to stick to reform programs once market pressure eases. Countries already struggling to implement austerity may not be sufficiently susceptible to the threat of sanctions.
More importantly, the new plan appears vague on how the euro zone will respond if another member state's debts prove unsustainable--a crucial question given the deterioration in the euro-zone economy. The two leaders said there would be no further bondholder losses, and Mrs. Merkel agreed to drop her demand that bondholders share the burden of future bailouts. Yet there is no plan to create euro bonds backed by a properly funded central authority able to make fiscal transfers to overindebted regions. Whatever the short-term relief as a result of deals reached this week, this is one major weakness in the latest plan the market may try to test before too long.
A recap with comments:
Member states will be required to "incorporate debt brakes" into their constitutions. Which sounds a bit like the balanced budget amendment that even US conservatives find too potentially onerous to pass.
Countries that borrow too much will be hit with automatic fines. But...if a country can't pay its bills, how will adding another bill to the pile improve its situation?
There will be no Euro-zone super-agency with enforcement powers. Each country will be in charge of its own finances. So Italy gets to manage its own pension plans...that should work out just fine.
As WSJ notes, the above sounds a lot like the Euro-zone's original Maastricht treaty -- which is still theoretically in force. Among other things, it requires signatories to keep their deficits within 3% of GDP and doesn't include a supra-national enforcement mechanism.
And it's still not clear how a highly-indebted country can cut its deficit without either devaluing its currency or slowing its economy. The latter would be the result under a stable euro regime, which would mean a recession, more borrowing and therefore more deficit cuts, right down to the point where wages are competitive with China and Vietnam. Is there any group of Europeans who would placidly accept that kind of lifestyle death spiral? The answer is probably no, which is leading some German officials to backpedal:
PARIS/BERLIN (Reuters) - Pessimistic comments from EU paymaster Germany and new figures exposing deepening stress among Europe's banks dented financial market hopes of a turning point in the euro zone's debt crisis at a summit this week.
President Nicolas Sarkozy and Chancellor Angela Merkel detailed their plan to amend the EU treaty to anchor stricter budget discipline in the euro area in a letter to European Council President Herman Van Rompuy on Wednesday.
The French finance minister said the leaders of France and Germany would not leave Friday's European Union summit until a "powerful" deal is reached to restore market trust and prevent the sovereign debt crisis spiraling out of control. But while Paris voiced determination, a senior German official gave a downbeat assessment of prospects for an agreement in an apparent effort to jolt partners into accepting Berlin's terms and respecting its red lines.
"I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal ... A lot of protagonists still have not understood how serious the situation is," the official told a pre-summit briefing.
"My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for," he said, speaking on condition of anonymity.
Some final thoughts:
The Europe that its elites envision looks like soft version of the US -- but with a balanced budget amendment.
You don't have to be a conspiracy theorist to believe that the creators of the Euro-zone wanted just such a union but knew they'd need an existential crisis to make it palatable. Whether by design or chance, they now have their crisis.
But even with the common currency imploding, a "fiscal union" with constitutionally limited borrowing power -- policed by Germany! -- is a serious challenge for a group of countries with multiple languages, varying attitudes about work versus leisure, and a history of reciprocal invasion.
So by Friday night they'll have a plan, because they have to. But the odds of something that creates a United States of Europe in very short order seem pretty slim. Meanwhile, the market's reaction to anything less might be apocalyptic. Looks like another sleepless weekend for hedge funds and politicians.