Posted by AzBlueMeanie:
Last week, exactly 20 years to the day after European leaders signed the treaty that led to the creation of the European Union and the euro currency, Chancellor Angela Merkel of Germany persuaded every current member of the union except Britain to endorse a new agreement calling for tighter regional oversight of government spending. German "austerity" won the day. Global European Leaders Agree on Fiscal Treaty – nytimes.com:
Europe’s worst financial crisis in generations is forging a new European Union, pushing Britain to the sidelines and creating a more integrated, fiscally disciplined core of nations under the auspices of a resurgent Germany.
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The agreement was a clear victory for Mrs. Merkel, and it prompted a sharp rally in stock markets in Europe and the United States. But it is viewed as unlikely to calm fears that Europe is unwilling to muster the financial firepower to defend the sovereign debts of big member states, including Italy and Spain, that have little or no economic growth and have big debt bills coming due soon.
At the meeting, member governments agreed to raise up to $270 billion that could be used by the International Monetary Fund to aid indebted European governments, and they moved up the date that a European rescue fund would come into operation. But the sums involved fell well short of what many investors and some Obama administration officials have argued are needed to ensure the survival of the euro. Administration officials on Friday welcomed the long-term overhaul of the euro zone’s rules, but argued that stronger measures were needed in the short run.
Germany has argued that the solution to the euro crisis is not a series of short-term bailouts but a long-term overhaul of the rules that govern European integration. Germany is using market turmoil as a cudgel to force more spendthrift European countries to adjust to their straitened circumstances by reducing spending and ushering in a period of austerity. But critics say such steps risk a deep recession.
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The big loser in Brussels was Britain, which had endorsed the 1991 Maastricht Treaty on European integration but opted out of the new euro common currency to preserve its economic and monetary independence.
Prime Minister David Cameron, a Conservative and self-acknowledged “euroskeptic,” was isolated in his refusal to allow the German prescription of “more Europe” — to give teeth to fiscal pledges underpinning the euro.
Mr. Cameron was perceived as having made a poor gamble in opposing the push by Mrs. Merkel and President Nicolas Sarkozy of France, embittering relations and possibly damaging his standing at home.
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The new disciplinary rules may help ensure that there will not be another euro crisis, but they may not be sufficient to fix the current crisis — to assuage market unease that Europe and the European Central Bank are not doing enough now to stand behind vulnerable nations.
While some progress was made here in increasing the size of the bailout funds to help the most heavily indebted states, it is still considered inadequate. That is largely because Germany refuses to sanction the use of the European Central Bank as a lender of last resort for the countries in the euro zone.
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[European leaders] made only limited progress in increasing the financial backstop to vulnerable and core nations like Italy and Spain, which are paying unsustainable interest rates on their bonds.
What worries many is the size of the euro zone debts that must be refinanced early next year. Euro zone governments have to repay more than 1.1 trillion euros, nearly $1.5 trillion, of long- and short-term debt in 2012, with about 519 billion euros, or $695 billion, of Italian, French and German debt maturing in the first half alone, according to Bloomberg News.
New Italian prime minister, the economist Mario Monti, said that the idea of collective bonds was not dead, despite continuing German and French opposition.
“Euro bonds, for which a tomb without flowers was being prepared, are not named” but will be raised again in March, he said. “There is more money, there is more discipline, it could be that this isn’t enough, but it doesn’t seem to be a failed summit.”
In Brussels, much of the attention was on Mr. Cameron’s failure to get what he wanted or to stop other leaders from getting what they wanted.
British hopes to lead an alliance of the 10 union members that do not use the euro were dashed. Mr. Cameron failed to bring along allies among the Nordic or ex-Communist nations whose membership in the bloc Britain had championed and who are usually regarded as more Atlanticist and favorable to free markets.
European officials argued that Mr. Cameron had in effect fallen into a French trap, making demands that most of his colleagues felt were unrelated to the euro zone crisis at issue. France has long desired an inner European core based on the countries that use the euro and excluding the free-market British.
“It’s a turning point,” said one senior European official. “Britain kept thinking that enlargement of the E.U. would make it come its way but it has turned out to weaken us.”
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It will strengthen the hand of British euroskeptics who will be emboldened to demand a renegotiation of British membership terms and a referendum.”
Mr. Cameron requested concessions meant to secure the position of Britain’s financial services sector from the impact of European legislation and to ensure that the City of London would not lose out in rules that give an advantage to euro zone financial centers. But others, led by Mr. Sarkozy, said they would not be held hostage to the services that many blame for the crisis.
Initial market reaction to the Brussels meeting was positive, but that has happened before as deal after deal has been struck between European leaders. Skeptics say that, economically, Chancellor Merkel, the hard-line "austerity queen" of Europe, has won a hollow victory, one that will fall apart like every other solution that was proclaimed as lasting but proved to be fleeting.
“If the new arrangement turns out to be too toothless to enforce the rules, we’ll be back to square one,” said Thomas Klau, a political analyst and head of the Paris office of the European Council on Foreign Relations.
President Obama warned ahead of the Brussels meeting that “There’s a short-term crisis that has to be resolved,” and “to make sure that markets have confidence that Europe stands behind the euro.” European leaders failed to stand behind the Euro.
By ignoring the short-term threat, American officials say, Merkel is unwittingly courting the very threat European leaders sought to keep at bay.
Whether Merkel’s strategy will work is a question that markets began to evaluate on Monday. It's not looking good. Already Moody's Warns of Downgrades in Euro Zone, and Europe's Markets Slump After Summit.
The deal on Friday in Brussels to reformulate the rules of the euro zone has probably saved the shared currency for now — but there may be less to it than meets the eye. European Debt Deal May Not Be a Cure:
With mounds of European debt due to be refinanced early next year, the crisis is far from over. “More tests will obviously come, and soon,” perhaps as early as the opening of financial markets on Monday, said Joschka Fischer, the former German foreign minister.
And there are risks remaining even in getting the Brussels deal ratified, which is likely to take until late summer 2012 at the soonest.
Austerity tends to bring recession, not growth, and Europe needs growth to cope with its debt. The Brussels deal is disappointing since it means there will be more austerity, which means less growth, and recession ahead, or far worse as Paul Krugman warns today. Depression and Democracy:
It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. . . And democratic values are under siege.
Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.
Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.
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Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.
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Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.
Krugman concludes, "[European leaders] need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the Euro may be the least of their worries."
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