Analysis: Summit will be a bruising affair as key players look to impose their own solutions

By David Howarth
Published on Saturday 3 December 2011 00:34

THE future of the eurozone is looking somewhat less bleak than it has over the past month. A compromise deal among the key players is taking shape to be finalised at the European summit in Brussels next week.

It may be that European leaders – collectively pushed by rising bond yields to peer over the precipice – have decided that more determined action is (finally) necessary.

A bitter battle has been raging between two camps expressing entrenched positions on how best to bolster the confidence in investors in eurozone member country sovereign debt and lower bond yields.

The first camp, led by the Germans and the European Central Bank (ECB), insists on reinforced euro area fiscal rectitude and structural reform. The second camp, effectively led by the French, demands a massive reinforcement of intervention on sovereign debt markets, by the ECB and by governments collectively through the European Financial Support Facility, to bolster market confidence in the solvency of certain eurozone countries.

The summit deal next week will have to go beyond the sticking plaster schemes adopted in July and October that failed to stem the crisis for more than a few days.

The explicit measures will allow the German government and the ECB to claim that their core positions on reinforced fiscal policy are respected, permitting them to move on greater intervention.

The deal will involve a range of explicit, legally binding measures and implicit agreements. The implicit agreements involve more determined intervention – the details remain hazy – providing stronger signals to the markets that eurozone governments and the ECB will do what it takes to lower bond yields.

One should be cautious, however, on the precise contours of the deal. Much is at stake and misinformation (some deliberate) is rife, as we have seen repeatedly during the crisis.

It is clear that the Germans have secured an agreement on rapid treaty change involving significantly reinforced eurozone fiscal rules. This agreement, combined with the appointment of technocratic governments in Greece and Italy committed to structural reform, gives chancellor Angela Merkel wiggle room in domestic politics to accept an increased German financial commitment that will not be publicly perceived as creating a moral hazard allowing profligate southern Europeans to water down or avoid reforms.

Yet the devil will be in the detail on these reforms. The recent show of unity barely disguises long-standing disagreements on the automaticity of fines, the role of the European Commission and the European Court of Justice in monitoring and enforcing the rules, pitting France – long opposed to eurozone “fiscal union” – against Germany.

The French will undertake to dilute the reforms as much as possible while holding Mrs Merkel to stump up on her commitment to solidarity. Next week’s summit promises to be a bruising and bitter affair.

• David Howarth is a senior lecturer in politics and international relations and holder of the Jean Monnet chair at the University of Edinburgh

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