09 December 2011

Paul N Goldschmidt: Initial thoughts on the European Summit Night Session

President Mario Draghi struck the right balance yesterday between the responsibilities of the EU political authorities (fiscal compact - Treaty reform) and those of the ECB (full respect for and compliance with the existing Treaty together with full support for the banking sector).

Draghi acted boldly on his side of the bargain by cutting the ECB base rate to record lows and by providing medium-term liquidity to the beleaguered banking system. By accepting to act as "Agent" for the EFSF, he also indicated the willingness of the ECB to provide technical assistance to the inexperienced and understaffed EFSF, while laying down the limits to which he is prepared to go within the Treaty boundaries.

It is now up to the Governments to deliver their side. The results of the night session of the Summit can be considered as a first step in the right direction but the proof will be in the eating which is likely to be highly indigestible.

Markets may have an initial neutral to positive reaction but, as soon as political parties in any of the 17 EMU Members voice their opposition (in particular in those countries where euro sceptic support is vital to coalitions in power as in Holland and Finland), or more broad reservations are voiced towards EU intrusion in national budgets or the automaticity of sanctions, doubts will again arise on the capacity of the eurozone to deliver. Markets will then resume their probing of the ultimate political will of deciders. Further market broadsides might prove fatal, leading governments to lose control over events and to a full blown market, economic and political crash.

The short-lived reprieve that may be granted by the market is all the more fragile that no credible answers have been put forward on two crucial questions.

1. How to reconcile short-term budgetary austerity with the need to foster growth?
2. How to untangle the incestuous relationship between the banking sector and the financing of government debt (without a fully integrated fiscal Union) and restore soundness to the banking system?

The danger underlying the first question is that austerity will limit economic growth leading to further austerity (imposed by the new constraining Treaty rules) and a vicious circle of long-term stagnation (depression?), a scenario endorsed by a broad spectrum of economists.

The danger underlying the second question is that in response to the more stringent capital requirements (Basel III+), these are met by asset disposals. Rather than promoting access to financing for investment, this would create a "credit crunch" denying any reasonable growth prospects.

As for the selfish and arrogant attitude of Mr Cameron, he could have easily obtained that the provisions concerning "intrusiveness" and "sanctions" only apply to EMU Members (which was the intention anyway) rather than refuse EU Treaty amendments according to the normal procedure. Demanding additional safeguards benefiting only Britain may have been an exercise aimed at domestic public opinion but will only reinforce the UK's isolation, as its total lack of EU solidarity is now clear for all to see. In the end this will lead to the UK's exit from the EU (much easier to negotiate because it is not in EMU) and its ultimate drowning (together with the City) in the murky waters of the North Sea singing "God save the Queen".

In conclusion: the jury is still out but will deliver its verdict in very short order!

Paul N Goldschmidt, Director, European Commission (ret); Member of the Thomas More Institute.

Tel: +32 (02) 6475310               +33 (04) 94732015                Mob: +32 (0497) 549259

Email:paul.goldschmidt@skynet.be                                     Web:www.paulngoldschmidt.eu

© Paul Goldschmidt