As European leaders celebrated a tentative agreement
to accept tougher budgetary rules among its members, critics expressed doubts the plan would cure the two-year-old Eurozone debt crisis.
Last week’s highly anticipated two-day summit resulted in 26 of the 27 European Union (EU) nations – the United Kingdom objected – agreeing to create a new treaty that would require members to keep budget deficits to within 0.5% of gross domestic product (GDP) in good economic times and within 3% of GDP in bad times.
EU governments would need to submit their budgets to a central fiscal authority, and violations would carry automatic penalties. The nations agreed to hammer out the details by March of next year.
World stock markets reacted positively, but many experts remain unconvinced that the EU has finally delivered the silver bullet needed to slay its monstrous debt crisis.
“They needed to create grand plan that’s really workable and not another grand illusion,” said Money Morning Chief Investment Strategist Keith Fitz-Gerald. “I’m afraid what we’re getting is just another grand illusion.”
In fact, last week’s meeting was the fifth summit called to deal with the European debt crisis since 2009. Each has produced its share of optimistic rhetoric, but no concrete solutions.
European leaders from France, Germany, the European Central Bank (ECB) and the International Monetary Fund all hailed the summit agreement as a major step toward getting the debt crisis under control.
“This is the breakthrough to the stability union,” said German Chancellor Angela Merkel at the end of the summit. “We are using the crisis as an opportunity for a renewal.”
“It’s a very good outcome for the euro area, very good,” added ECB President Mario Draghi “It is going to be the basis for much more disciplined economic policy for euro-area members.”
Fitz-Gerald said Europe’s leaders mean what they say, but ultimately the latest summit will do little more than spark a brief rally in the markets.
“These government officials still don’t get it,” Fitz-Gerald said. “They’re still not addressing the underlying problems. We’ll be having this conversation again next year.”
A Tough Sell
Although enforcing budgetary austerity would help prevent current debt problems from getting worse, it’s unlikely the citizenry of most EU member nations will allow it to happen.
“Their proposal is preposterous,” writes Brett Arends of MarketWatch, likening the EU plan to the United States allowing its largest creditors, Japan and China, control over the federal budget.
“How would you feel if you opened the paper to be told that the new Sino-Japanese “Fiscal Stability Commission’ in Washington had just slashed your grandma’s Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?,” Arends said. “That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland.”
Some questioned whether the proposed plan – establishing a central authority over the budgets of sovereign nations – would prove illegal.
“The first question is, is it legal on a European level? Is it breaching European law? Because if that were the case you can forget about the whole thing,” Bert Van Roosebeke, an economist from the Center for European Policy in Freiburg, Germany, told USA Today. “If it’s not breaching European law then you have to ask yourself the question in every single country, is this compatible with my national constitution?”
Britain, which is a member of the 27-member EU but not the 17-nation Eurozone, objected to the summit’s plan for basically the same reasons.
“What was on offer is not in Britain’s interest so I didn’t agree to it,” said British Prime Minister David Cameron. “We’re not in the euro and I’m glad we’re not in the euro. We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.”
Fitz-Gerald expressed skepticism that the nations would live by the new rules in any case, noting that several of the troubled nations, particularly Greece, found ways to skirt fiscal responsibility requirements they were supposed to meet as a condition of admission to the Eurozone in the first place.
“They’ve had rules all along, but they’ve never bothered to enforce them,” Fitz-Gerald said.
Skimping on Bailout Funds
On the subject of additional bailout money, the summit participants chose to provide just $268 billion (200 billion euros) of additional loans to the IMF, and that the EU’s permanent bailout fund, the European Stability Mechanism, will be capped at $666 billion (500 billion euros).
Like the push for EU-wide austerity, the minimal increase in bailout money was driven by Germany, which as the wealthiest nation in the Eurozone has grown wearing of paying for the debts of its neighbors.
In fact, Germany has already adopted measures that it predicts will deliver balanced budgets by 2015.
Fitz-Gerald said that the rest of Europe needs to follow Germany’s example, even if it produces short-term pain. And he made it clear that no matter how hard EU leaders try to wriggle out of it, any long-term solution to the Eurozone debt crisis will involve some fiscal pain, primarily by letting the debtors fail.
“They’ve got to take their medicine,” Fitz-Gerald said. “It’s like a patient that needs its arteries cleaned out. In the long run, the patient will be much healthier, but it will be hell for the markets for a while.”