Fresh out of a disorienting hailstorm, markets were – are – in need of a firm voice to give direction toward solid ground in the European sovereign debt crisis. The several hours of discussion this week might fade distantly for months or longer as markets listen for the next urgent signal.
Doubts about EU leaders' capability to solve the sovereign debt crisis caused market turmoil two weeks ago, so Tuesday's meeting between Angela Merkel and Nicolas Sarkozy was eagerly awaited. Alas, it disappointed.
The meeting's three conclusions barely convinced market participants: 1) The creation of a European economic council led by Herman Van Rompuy, the current President of the European Council, which will meet at least twice a year; 2) The installment of a balanced budget rule, to be written in the constitution of each Eurozone member country; and 3) The creation of a tax on financial transactions, the so-called Tobin tax.
Market participants were disappointed to hear that the hotly debated Eurobonds were not considered as a first step toward fiscal integration but only as the likely last step once that integration was well advanced, meaning not very soon. Also disheartening, the European Financial Stability Fund will not receive more funds at this stage; it is seen as “well capitalized” despite the fact that the contagion has now reached Spain and Italy. Market participants thus reacted negatively; indices fell. At first glance, though, some of the proposals made by the French President and the German Chancellor can be seen as steps towards the necessary fiscal integration of the European Monetary Union.
Many caveats unfortunately trail these good intentions. To be effective, a European economic council would need power and a means of coercion, thus requiring unanimous agreement of all seventeen Eurozone member countries.
The same would be true for the balanced budget rule. Even in France such a rule could hardly be put into the constitution within a few months. In France this means a popular referendum, which the currently not-so-popular president is far from certain to win, or a three-fifths majority in the French Congress, which is the sum of the National Assembly and the Senate. While Nicolas Sarkozy has the majority in both chambers, but not a three-fifths majority. Hence he would need votes from the French socialist party to change the constitution, but the French socialists are currently seeing this balanced budget rule as a trap ahead of the French presidential elections scheduled for May 2012.
Finally, the introduction of a so-called Tobin tax on financial transactions is an old hat with no chance of effectiveness without an agreement not only among the Eurozone member countries but also with all other extra-European countries and financial centers.
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