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Pledge of Euro Unity May Not Be Enough to Satisfy Markets

Wednesday, 17 August 2011 10:02 By Jack Ewing and Steven Erlanger, Truthout | Report

Paris - The leaders of France and Germany on Tuesday promised to take concrete steps toward a closer political and economic union of the 17 countries that use the euro, but it was unclear whether their proposals would be sufficient, or come quickly enough, to satisfy markets anxious over Europe’s debts and listless economies.

Reflecting the uncertainty, European stock markets were mixed on Wednesday, with indexes in Britain and Germany down at midday but French and Italian shares showing modest gains. The response seemed to show that the two leaders’ announcement had failed initially to ease market jitters.

“In terms of new policies to address the immediate debt problems, there was little new,” analysts at Nomura said in a note Wednesday.

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany called for each nation in the euro zone to enshrine a “golden rule” into their national constitutions to work toward balanced budgets and debt reduction, a level of discipline well beyond the current, oft-broken commitment.

They also pledged to push for a new tax on financial transactions, and for regular summit meetings of the zone’s members under the leadership of Herman Van Rompuy, who heads the council of all 27 European nations.

“We are certainly heading for greater economic integration of the euro zone,” Mr. Sarkozy said.

The much-anticipated meeting at the Élysée Palace here produced little that would seem to quell the nerves of bond traders, who are becoming increasingly worried that the economic slowdown in both Germany and France will make it harder to overcome Europe’s debt crisis.

Both leaders ruled out issuing collective bonds, known as eurobonds, to share responsibility for government debt across member states, and they opposed a further increase in a bailout fund that will not be put into place until late September at the earliest.

Mrs. Merkel repeated that there was “no magic wand” to solve all the problems of the euro, arguing that they must be met over time with improved fiscal discipline, competitiveness and economic growth among weaker states.

Even the stronger members of the euro zone have stalled. Official figures released on Tuesday showed that growth in the zone fell to its lowest rate in two years during the second quarter, and that Germany — considered the Continent’s locomotive — came almost to a standstill, growing 0.1 percent.

The German figures followed data showing that the French economy was flat in the second quarter, leaving Europe’s two largest economies stagnant. That means the two pillars of the European economy may be less willing and able to prop up their weaker counterparts, analysts warned.

Across the euro zone, gross domestic product rose only 0.2 percent in the second quarter from the first, when growth had advanced by 0.8 percent, according to Eurostat, the European Union’s statistics agency.

The joint French-German proposals were as modest as German officials had forecast. And the most ambitious idea — that all euro zone states legally bind themselves to working toward balanced budgets and reduced sovereign debt — is unlikely to be accepted by all member states. It may not even get through the French constitutional process, since Mr. Sarkozy does not have a constitutional majority in Parliament.

The proposal calling for twice-yearly meetings and increased integration could formalize the “two-speed Europe” — of those in the euro zone and those outside it — that many warned of when the European Union expanded so rapidly after the collapse of the Soviet Union in the early 1990s.

Both leaders said that France and Germany must set an example, citing their agreement to propose jointly a financial-transaction tax by 2013 as “an example of convergence” needed in the entire euro zone. But such a tax is unlikely in the larger European Union, especially if Britain, which is outside the euro zone and contains Europe’s biggest financial center, continues to resist the idea.

They also said they would work to harmonize French and German economic assessments and, in the future, corporate tax rates.

“France and Germany are committed to strengthen the euro,” Mrs. Merkel said. “To that end we need to better integrate our economies” and “to see that the stability pact will be acted on.”

The stability pact, a central element of the treaty that established the euro zone, commits members to keep fiscal deficits to 3 percent of gross domestic product a year and total sovereign debt under 60 percent of G.D.P. Both benchmarks are regularly missed.

The Sarkozy-Merkel meeting came after a dizzying week in the markets and a general gloom about the lack of European leadership on the euro. Economists said the weak data could simply reflect a pause after two years of brisk expansion. But the numbers could also signal that the sovereign debt crisis is undercutting growth outside the countries like Spain that are most directly affected.

“The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy,” Lloyd Barton, an economist, said in a note Tuesday.

If there was any silver lining, it was the hope that slower growth would lead to less inflation, giving the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week, the bank has been buying Italian and Spanish debt on the open market to hold down yields so the two countries do not face ruinous borrowing costs.

What impetus remains in the European economy came from countries like Austria and Finland. Even Italy, with growth of 0.3 percent compared with the previous quarter, outperformed Germany. A whiff of hope came from Portugal, one of the countries at the heart of the debt crisis, as the economy stopped shrinking for the first time since October 2010.

Given the problems in the euro zone — sovereign debt, undercapitalized banks, aging populations, imbalances in trade, growth and competitiveness between northern and southern countries — many analysts and some officials have been pushing for the introduction of eurobonds, which would combine the credibility and collateral of all the members of the currency union.

But that could lead to a rise in borrowing costs for Germany and France, and a considerable rise in risk, too, something that neither country is currently prepared to accept, beyond a July 21 agreement to expand a bailout fund to 440 billion euros.

Mrs. Merkel in particular, cautious by nature, rules in a coalition with a weakened partner, the liberal Free Democrats. Her own Christian Democrats are largely against writing blank checks for Europe, and the German constitutional court may not find eurobonds legal. Mrs. Merkel could probably find support among the opposition Social Democrats and Greens, but that would divide her party and undermine her government.

Mrs. Merkel is going to have enough trouble getting the July 21 agreement through Parliament.

As the chancellor’s European-minded finance minister, Wolfgang Schäuble, told the newsmagazine Der Spiegel over the weekend, “I rule out eurobonds as long as member states conduct their own financial policies.”

This article, "Pledge of Euro Unity May Not Be Enough to Satisfy Markets," originally appeared in The New York Times.


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Pledge of Euro Unity May Not Be Enough to Satisfy Markets

Wednesday, 17 August 2011 10:02 By Jack Ewing and Steven Erlanger, Truthout | Report

Paris - The leaders of France and Germany on Tuesday promised to take concrete steps toward a closer political and economic union of the 17 countries that use the euro, but it was unclear whether their proposals would be sufficient, or come quickly enough, to satisfy markets anxious over Europe’s debts and listless economies.

Reflecting the uncertainty, European stock markets were mixed on Wednesday, with indexes in Britain and Germany down at midday but French and Italian shares showing modest gains. The response seemed to show that the two leaders’ announcement had failed initially to ease market jitters.

“In terms of new policies to address the immediate debt problems, there was little new,” analysts at Nomura said in a note Wednesday.

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany called for each nation in the euro zone to enshrine a “golden rule” into their national constitutions to work toward balanced budgets and debt reduction, a level of discipline well beyond the current, oft-broken commitment.

They also pledged to push for a new tax on financial transactions, and for regular summit meetings of the zone’s members under the leadership of Herman Van Rompuy, who heads the council of all 27 European nations.

“We are certainly heading for greater economic integration of the euro zone,” Mr. Sarkozy said.

The much-anticipated meeting at the Élysée Palace here produced little that would seem to quell the nerves of bond traders, who are becoming increasingly worried that the economic slowdown in both Germany and France will make it harder to overcome Europe’s debt crisis.

Both leaders ruled out issuing collective bonds, known as eurobonds, to share responsibility for government debt across member states, and they opposed a further increase in a bailout fund that will not be put into place until late September at the earliest.

Mrs. Merkel repeated that there was “no magic wand” to solve all the problems of the euro, arguing that they must be met over time with improved fiscal discipline, competitiveness and economic growth among weaker states.

Even the stronger members of the euro zone have stalled. Official figures released on Tuesday showed that growth in the zone fell to its lowest rate in two years during the second quarter, and that Germany — considered the Continent’s locomotive — came almost to a standstill, growing 0.1 percent.

The German figures followed data showing that the French economy was flat in the second quarter, leaving Europe’s two largest economies stagnant. That means the two pillars of the European economy may be less willing and able to prop up their weaker counterparts, analysts warned.

Across the euro zone, gross domestic product rose only 0.2 percent in the second quarter from the first, when growth had advanced by 0.8 percent, according to Eurostat, the European Union’s statistics agency.

The joint French-German proposals were as modest as German officials had forecast. And the most ambitious idea — that all euro zone states legally bind themselves to working toward balanced budgets and reduced sovereign debt — is unlikely to be accepted by all member states. It may not even get through the French constitutional process, since Mr. Sarkozy does not have a constitutional majority in Parliament.

The proposal calling for twice-yearly meetings and increased integration could formalize the “two-speed Europe” — of those in the euro zone and those outside it — that many warned of when the European Union expanded so rapidly after the collapse of the Soviet Union in the early 1990s.

Both leaders said that France and Germany must set an example, citing their agreement to propose jointly a financial-transaction tax by 2013 as “an example of convergence” needed in the entire euro zone. But such a tax is unlikely in the larger European Union, especially if Britain, which is outside the euro zone and contains Europe’s biggest financial center, continues to resist the idea.

They also said they would work to harmonize French and German economic assessments and, in the future, corporate tax rates.

“France and Germany are committed to strengthen the euro,” Mrs. Merkel said. “To that end we need to better integrate our economies” and “to see that the stability pact will be acted on.”

The stability pact, a central element of the treaty that established the euro zone, commits members to keep fiscal deficits to 3 percent of gross domestic product a year and total sovereign debt under 60 percent of G.D.P. Both benchmarks are regularly missed.

The Sarkozy-Merkel meeting came after a dizzying week in the markets and a general gloom about the lack of European leadership on the euro. Economists said the weak data could simply reflect a pause after two years of brisk expansion. But the numbers could also signal that the sovereign debt crisis is undercutting growth outside the countries like Spain that are most directly affected.

“The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy,” Lloyd Barton, an economist, said in a note Tuesday.

If there was any silver lining, it was the hope that slower growth would lead to less inflation, giving the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week, the bank has been buying Italian and Spanish debt on the open market to hold down yields so the two countries do not face ruinous borrowing costs.

What impetus remains in the European economy came from countries like Austria and Finland. Even Italy, with growth of 0.3 percent compared with the previous quarter, outperformed Germany. A whiff of hope came from Portugal, one of the countries at the heart of the debt crisis, as the economy stopped shrinking for the first time since October 2010.

Given the problems in the euro zone — sovereign debt, undercapitalized banks, aging populations, imbalances in trade, growth and competitiveness between northern and southern countries — many analysts and some officials have been pushing for the introduction of eurobonds, which would combine the credibility and collateral of all the members of the currency union.

But that could lead to a rise in borrowing costs for Germany and France, and a considerable rise in risk, too, something that neither country is currently prepared to accept, beyond a July 21 agreement to expand a bailout fund to 440 billion euros.

Mrs. Merkel in particular, cautious by nature, rules in a coalition with a weakened partner, the liberal Free Democrats. Her own Christian Democrats are largely against writing blank checks for Europe, and the German constitutional court may not find eurobonds legal. Mrs. Merkel could probably find support among the opposition Social Democrats and Greens, but that would divide her party and undermine her government.

Mrs. Merkel is going to have enough trouble getting the July 21 agreement through Parliament.

As the chancellor’s European-minded finance minister, Wolfgang Schäuble, told the newsmagazine Der Spiegel over the weekend, “I rule out eurobonds as long as member states conduct their own financial policies.”

This article, "Pledge of Euro Unity May Not Be Enough to Satisfy Markets," originally appeared in The New York Times.


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