A European agreement was reached Friday that apparently resulted in the UK being “relegated to the second division of Europe”. Britain’s Prime Minister was forced to Veto a plan for 27 countries to forge ahead with closer budgetary controls, and with the veto and lack of support, Britain’s vote “lost” 26 to 1. Better yet, short term the core 17 countries will forge ahead and, pending parliamentary approval (not guaranteed), the remaining non Euro bound 8 countries will join. The current EU treaties will remain in place however, for now. What does this all mean?
Little, in my view. Despite the European press having a field day trouncing the British (as they always like to do), the result is extremely risky. The first country to flounce such “budgetary controls” in the past was Germany! France did too. Do you honestly think that with automatic rules in place that such things won’t be overridden with the paymaster general has to go overdrawn for a few months?
What are these countries singing up for? They are supporting the idea that their fiscal and budgetary plans will be submitted to a central authority for approval. This central authority is not yet known, but if it represents any part of the EU structure, it will be unelected politicians or technocrats that no one even knows the name of. Does anyone seriously think this will save the Euro, or resolve the current debt crisis? Better yet many of these other countries have yet to ratify the agreement with their own governments at home. So it is not even a done-deal, yet.
The one good set of agreement came Thursday when decisions were taken by the ECB to increase the set of funds available to it to help support banks. Though details leaked also that the ECB was taking lower quality bonds from banks to help ease the liquidity problem. Seems like the ECB is watering down its asset quality, and all it can do is print money.
This so called “agreement” just does not work. There is one major issue not addressed at all, and one minor issue that will come about as a result. The main issue that is at the heart of the debt crisis is that EU countries are economically at odds with each other. Germany is a creditor nation, led by exports and not (consumer) spending. Greece, in the other hand, is the mirror image. Greece is a debtor nation, consuming and not exporting. Greece is economically too small but look at Italy, Spain, Portugal, and other countries – even France. The root of the problem is the imbalance in the way the countries P&L are managed. Until and if there is one P&L, this model cannot work. The fault lines will remain in place. Having a budget control in place does not change how these economies work. Until and if Germany acts more like Greece, and Greece acts more like Germany, the issues will remain.
Second, the implied budget control process is fraught with political disaster. What will happen when a peripheral country submits their budget the EU control body say, “sorry buddy, you are spending too much you need to cut back somehow”? This has to happen, and by a lot, due to the main issue outlined above. Many countries that go through this process will cry “foul” since they will be told buy a third party to change how they run their countries. This willingness to shift sovereignty is what this new agreement is all about. But it seems no one is talking about how it will work. Politicians will baulk from being told to cut, cut, cut, and governments will topple or be in conflict with the new budgetary process. Worse, the penalties for violation of budgetary rules will be financial. That’s dumb. This is like penalizing a thirsty man by taking his access to water away – he remains even more thirst.
This new agreement sounds good – but does not hold up. It can’t work as documented so far – in fact there is a severe lack of documentation. It seeks to address a future failure of a European country that fails to manage its own money – that is not the problem at hand. We have failed and failing governments now! And to read how the European press are “all over the odd man of Europe” (Britain) is just rich. The Financial Times US print edition ["Britain's cold shoulder for Europe", December 10, 2011) wrote a narrative about how the meeting panned out Thursday and Friday. It turns out that the UK was blighted and prevented from explaining its real requirements that would have prevented the veto. President Sarkozy, apparently, summarized the UK's requirements incorrectly and many other leaders therefore misunderstood and immediately went against the UK"s demands. Frankly I am glad. If Britain is isolated, they are (as Terry Smith, chief executive of Tullet Prebon, "...as isolated as someone who refused to join the [unfinished] Titanic just before it sailed.” So be it.