Fiscal compact on track say Merkel, Sarkozy
by Daniel Mason
09 January 2012
Angela Merkel and Nicolas Sarkozy have said the European Union's fiscal pact to enforce economic discipline in eurozone member states might be agreed this month and signed by the beginning of March. But despite reiterating their support for the euro the pair warned Greece that it would not receive the next installment of its bail-out funds unless it moved more quickly to reach a deal with the private sector on debt restructuring.
The German Chancellor and French President held their first bilateral meeting of 2012 in Berlin today to discuss the debt crisis, a strategy for growth and proposals for a tax on financial transactions – ahead of an EU summit on January 30. Merkel also said she would meet International Monetary Fund managing director Christine Lagarde tomorrow and Italian Prime Minister Mario Monti on Wednesday.
Merkel said the progress of negotiations on the fiscal compact to impose limits on public debt and deficits in euro area countries was "pleasing", with a deal potentially agreed by the end of this month. And Sarkozy, who described the crisis as "very tense", added that it should be formally signed by March 1. Meanwhile the German leader said the two countries would look at bringing forward payments into the EU's new bail-out fund, the European Stability Mechanism, "to once again show our trust in and our support for the euro area".
In an effort to boost growth, the two leaders said they would compare labour market practices throughout Europe and learn from the best. But there were stern words for Greece, with Merkel insisting that an agreement made last October for private sector involvement in debt restructuring had to be finalised quickly. "From our point of view, the second Greek aid package including this restructuring, must be in place quickly. Otherwise it won't be possible to pay out the next tranche for Greece. Our goal is that no country has to leave the eurozone." Bondholders were expected to take a 50 per cent hit on Greek debts as part of the €130bn rescue package.
On the financial transaction tax Merkel – who said she was "personally" in favour of the levy but admitted there was no agreement within the German government – called on eurozone finance ministers to deliver a report on the proposals by March. And Sarkozy made clear he would push ahead, saying: "If we don't show the example, it will not be done". The French government has previously suggested it wanted the financial transaction tax introduced this year and would push ahead with national legislation before Sarkozy faced presidential elections in April. But the policy faces opposition from EU members including Sweden and the United Kingdom. British Prime Minister David Cameron has said he would veto the plan unless it was adopted globally.
Responding to Merkel and Sarkozy's comments, Sony Kapoor, managing director of the think-tank Re-Define, said that "mere lip-service to growth" was not enough and warned that "many of the more troubled economies are at serious risk of snowballing out of control under excessive austerity". Describing both the fiscal compact and bringing forward the ESM as "marginal" to solving the crisis, he said a financial transaction tax was "one of the good answers to the question of how best to mobilise much-needed additional tax revenue in the EU".
There was mixed news today for the German economy. In a better performance than widely predicted, exports rose 2.5 per cent in November as imports fell – pushing the trade surplus up to €15bn. Similarly in France exports were also up and imports flat, shrinking its trade deficit to €4.4bn. However, German industrial production was down 0.6 per cent in the same month. And statistics published on Friday showed that industrial orders fell by 4.8 per cent in November, the biggest drop in almost three years and following an increase of 5 per cent in October.
Jennifer McKeown, senior European economist at Capital Economics, said the fall in industrial production confirmed "that the recovery in what has been the strongest sector of the eurozone's strongest economy is now in reverse". She added that the exports data showed resilience but surveys of orders suggested it might not last. "All in all, while Germany should fare better than most other eurozone economies in the coming months, we doubt that it will avoid recession and see GDP falling by about 0.5 per cent this year and perhaps 1.5 per cent in 2013.
Today Germany sold €3.9bn of six-month bills at a negative interest rate of -0.0122 per cent; according to the Bundesbank it was the first time investors had agreed a negative yield on German debt. Also today the EU successfully issued €3bn of bonds with a maturity of 30 years to be split equally between Ireland and Portugal as part of their bail-outs, with 70 per cent of investor demand coming from Germany. But in Greece, industrial output shrank by 7.8 per cent on a year-on-year basis in November, and on Friday night eurozone banks deposited €463.5bn with the European Central Bank as bank-to-bank lending dropped to a nine-month low.
Nigel Farage, leader of the UK Independence Party and a member of the European Parliament, described Merkel and Sarkozy's meeting as a "charade". He said: "It helps no one and brings them and the whole of the continent into disrepute. The answers are out there of course they are, but because they would require the scaling back of their centralising vision for the EU they cannot countenance them. In the meantime the economies of Europe are put under greater pressure and millions lose their jobs and suffer acute financial pain. It is just not good enough."
The German Chancellor and French President held their first bilateral meeting of 2012 in Berlin today to discuss the debt crisis, a strategy for growth and proposals for a tax on financial transactions – ahead of an EU summit on January 30. Merkel also said she would meet International Monetary Fund managing director Christine Lagarde tomorrow and Italian Prime Minister Mario Monti on Wednesday.
Merkel said the progress of negotiations on the fiscal compact to impose limits on public debt and deficits in euro area countries was "pleasing", with a deal potentially agreed by the end of this month. And Sarkozy, who described the crisis as "very tense", added that it should be formally signed by March 1. Meanwhile the German leader said the two countries would look at bringing forward payments into the EU's new bail-out fund, the European Stability Mechanism, "to once again show our trust in and our support for the euro area".
In an effort to boost growth, the two leaders said they would compare labour market practices throughout Europe and learn from the best. But there were stern words for Greece, with Merkel insisting that an agreement made last October for private sector involvement in debt restructuring had to be finalised quickly. "From our point of view, the second Greek aid package including this restructuring, must be in place quickly. Otherwise it won't be possible to pay out the next tranche for Greece. Our goal is that no country has to leave the eurozone." Bondholders were expected to take a 50 per cent hit on Greek debts as part of the €130bn rescue package.
On the financial transaction tax Merkel – who said she was "personally" in favour of the levy but admitted there was no agreement within the German government – called on eurozone finance ministers to deliver a report on the proposals by March. And Sarkozy made clear he would push ahead, saying: "If we don't show the example, it will not be done". The French government has previously suggested it wanted the financial transaction tax introduced this year and would push ahead with national legislation before Sarkozy faced presidential elections in April. But the policy faces opposition from EU members including Sweden and the United Kingdom. British Prime Minister David Cameron has said he would veto the plan unless it was adopted globally.
Responding to Merkel and Sarkozy's comments, Sony Kapoor, managing director of the think-tank Re-Define, said that "mere lip-service to growth" was not enough and warned that "many of the more troubled economies are at serious risk of snowballing out of control under excessive austerity". Describing both the fiscal compact and bringing forward the ESM as "marginal" to solving the crisis, he said a financial transaction tax was "one of the good answers to the question of how best to mobilise much-needed additional tax revenue in the EU".
There was mixed news today for the German economy. In a better performance than widely predicted, exports rose 2.5 per cent in November as imports fell – pushing the trade surplus up to €15bn. Similarly in France exports were also up and imports flat, shrinking its trade deficit to €4.4bn. However, German industrial production was down 0.6 per cent in the same month. And statistics published on Friday showed that industrial orders fell by 4.8 per cent in November, the biggest drop in almost three years and following an increase of 5 per cent in October.
Jennifer McKeown, senior European economist at Capital Economics, said the fall in industrial production confirmed "that the recovery in what has been the strongest sector of the eurozone's strongest economy is now in reverse". She added that the exports data showed resilience but surveys of orders suggested it might not last. "All in all, while Germany should fare better than most other eurozone economies in the coming months, we doubt that it will avoid recession and see GDP falling by about 0.5 per cent this year and perhaps 1.5 per cent in 2013.
Today Germany sold €3.9bn of six-month bills at a negative interest rate of -0.0122 per cent; according to the Bundesbank it was the first time investors had agreed a negative yield on German debt. Also today the EU successfully issued €3bn of bonds with a maturity of 30 years to be split equally between Ireland and Portugal as part of their bail-outs, with 70 per cent of investor demand coming from Germany. But in Greece, industrial output shrank by 7.8 per cent on a year-on-year basis in November, and on Friday night eurozone banks deposited €463.5bn with the European Central Bank as bank-to-bank lending dropped to a nine-month low.
Nigel Farage, leader of the UK Independence Party and a member of the European Parliament, described Merkel and Sarkozy's meeting as a "charade". He said: "It helps no one and brings them and the whole of the continent into disrepute. The answers are out there of course they are, but because they would require the scaling back of their centralising vision for the EU they cannot countenance them. In the meantime the economies of Europe are put under greater pressure and millions lose their jobs and suffer acute financial pain. It is just not good enough."
COMMENTS
This hanging on to the euro regardless of cost seems a one way ticket to bankruptcy. Moreover, fiscal agreements without political integration is pretty much a recipe for civil unrest when it is perceived in member countries that austerity is being dictated by unelected officials who are not even their own citizens. The word 'democracy' is almost certain to become one of the commonest used words, and principles, in 2012. Indeed, it is the search of democracy in a fiscal tie up which may cause some countries to withdraw from the eurozone, in addition to insolvency in others,
Whilst Merkel and Sarkozy may be brim full of idealism, and we all have ideals. They are short of the counter balance of realism. At the moment they both seem to be betting on the longevity of an iceberg.
Vernony - Maldon/England
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