By Mike Whitney
When the book is finally closed on this week’s EU summit, it’ll be interesting to see what people remember the most. Will it be the proposed changes to the Lisbon Treaty, the new steps towards fiscal integration or the disgraceful behavior of David Cameron?
My money’s on Cameron. The UK’s brash Prime Minister did his level-best to derail the collective effort by– setting aside the interests of his country or those of crisis-stricken Europe–and acting as chief toady for the financial service industry. Cameron doesn’t even try to hide the fact that he is owned by big finance. The only thing he really cares about is sabotaging any attempt to regulate financial speculation. Here’s how he defended himself:
“What is on offer isn’t in Britain’s interests so I didn’t agree to it. Of course we want the eurozone countries to come together and to solve their problems. But we should only allow that to happen
inside the European Union treaties if there are proper protections for the single market and for other key British interests.”
Right. The PM was only fulfilling his patriotic duty, don’t you know. Only that’s not how everyone else saw it. They thought Cameron was just kowtowing to his own deep-pocket constituents. Here’s how French President Nicholas Sarkozy summed it up:
“Very simply, in order to accept the reform of the treaty, David Cameron asked for what we thought was unacceptable: a protocol to exonerate the UK from financial services regulation. We could not accept this as at least part of the problems [Europe is facing] came from this sector.”
Now Cameron will have to figure out a way to climb down from his hardline position or face further isolation from his trading partners in the EU block.
As for the summit itself, it was a typical euro-fiasco, long on grand proclamations and photo ops and short on meaningful reform. German Chancellor Angela Merkel has gotten it into her head, that all the eurozone’s problems can be traced to the wastrel spending habits of countries in the South. She has yet to consider that the capital flows that triggered the crisis all came from German, French and UK banks trying to make a buck on sovereign bonds that were just basis points above rock-solid German bund. The same phenom inflated the housing bubble in the US from 2001 to 2006. The $600 billion current account deficit kept capital flowing into Wall Street’s garbage assets (MBS, CDOs) while economists waved their hands overhead warning of an impending implosion. No one listened. The rest is history.
On Friday, stocks rose sharply indicating that investors take a generally positive view of the summit’s outcome. Unfortunately, we’ve seen this movie before. The surge usually lasts one-full trading session before the selloff begins. While the European Central Bank (ECB) did throw a lifeline to the banks by extending emergency loans for up to 3 years, by slashing interest rates, and by accepting any manner of dodgy collateral for loans; ECB chief Mario Draghi stopped short of backstopping sovereign debt or acting as lender of last resort. In fact, markets plunged yesterday after Draghi announced that he has no intention of keeping rates on sovereign debt low via quantitative easing.
“We have a treaty and Article 123 prohibits financing of governments. It embodies the best tradition of the Bundesbank. We shouldn’t try to circumvent the spirit of the treaty,” he said. He also shrugged off using the IMF as an instrument to conduct stealth QE. According to the Telegraph, Draghi said:
“Let us not forget that the ECB is not a member of the IMF. One cannot channel money in a way to circumvent the treaty provisions. If the IMF were to use this money to buy exclusively European bonds, we think is not compatible with the treaty.”
So, no lender of last resort, no QE, and no allowing the emergency fund (ESM) to be used as a bank. (which would maximize leverage) At the same time, member states are being asked to ratify changes to the existing treaty that would compromise their sovereignty if budget deficits exceed 5 percent of GDP. This is a rather clumsy and intrusive way of establishing a central fiscal authority. Merkel sees this kind of control over national budgets as the only way to avert another crisis in the future. Opposition to the plan is likely to be ferocious.
All in all, the summit was a spectacular waste of time barely confusing enough to send stocks on a one-day tear. Here’s how Reuter’s blogger Felix Salmon summarizes the 2 day confab:
“…it is now, officially, too late to save the Eurozone: the collapse of the entire edifice is now not a matter of if but rather of when….
The fundamental problem is that there isn’t enough money to go around. The current bailout fund, the European Financial Stability Facility, is barely big enough to cope with Greece; it doesn’t have a chance of being able to bail out a big economy like Italy or Spain….
And there’s more bad news, too. All of Europe’s hopes right now are being placed in something called the European Stability Mechanism — a permanent successor to the temporary EFSF…. (But) the European leaders seem determined, today, to prevent the ESM from operating as a bank at all. Which means it will never get the firepower it needs to be taken seriously….
It all adds up to one of the most disastrous summits imaginable….Europe’s leaders have set a course which leads directly to a gruesome global recession, before we’ve even recovered from the last one.” (“Europe’s Disastrous Summit”, Felix Salmon, Reuters)
Merkel and Sarkozy have cobbled together a needlessly punitive agreement that fails to address the fundamental issues that are tearing the eurozone apart. It’s only a matter of time before soaring bond yields and bank failures send them rushing back to the drawing board.