Analysis: Prepare to batten down the hatches as long and winding saga nears its final chapter

By David Howarth
Published on Sunday 18 December 2011 00:00

IF DAVID Cameron played hardball at the European summit of 8-9 December and vetoed proposed changes to the EU treaties, this was certainly not because they would amount to a significant reinforcement of euro area economic governance and a “two-tiered” Europe.

Euro area bond yields dropped over the past few days but this owes to unprecedented European Central Bank efforts to boost liquidity in the euro area. Dropping yields is not a sign that financial markets have responded favourably to the summit deal.

With euro area debt loads rising and growth stalling, the intensity of the sovereign debt crisis is set to increase and credit-rating downgrades of several euro area governments loom.

Hopes for an agreement that could calm financial markets either ignored or wished away well-entrenched national differences on the main areas of euro area governance. The German government and its allies in the north place emphasis upon fiscal consolidation and structural reforms. The French government and its allies in the south demand support mechanisms and European Central Bank (ECB) action to save the day. Reconciliation of these two sides in such a way as to boost market confidence and bring bond yields down sustainably is unlikely.

The so-called “Stability and Growth Union” agreed in Brussels placed emphasis on reinforced fiscal rules, suggesting a German victory. Closer inspection of the proposed reforms, however, shows that German demands for “fiscal union” – including automatically imposed fines for deficit rule breakers – were watered down. The French position, with its emphasis on national, constitutionally enshrined golden rules rather than directly EU-imposed rules, largely won out.

Clearly, movement on reinforced fiscal policy was necessary to achieve German agreement on increased financial support for governments having trouble flogging their debt. But just as the fiscal rules were fudged, the agreement on additional financial support fell far short of the big bazooka for which many have been calling for some time. EU governments agreed to provide up to €200 billion more to the International Monetary Fund, to then be funnelled back to the euro area to buy up sovereign debt.

Details, however, were left vague and last week saw growing international opposition to this move. The introduction of “euro bonds”, perhaps now the only possible government action capable of calming the markets, appears to be permanently off the table, at German insistence.

In the meantime, the ECB – seen by many as a potential saviour – has effectively confirmed that despite the proposed reinforcement of fiscal rules it has no intention of stepping up its current “temporary and limited” bond buying programme. The ECB remains staunchly opposed to the monetisation of debt, while engaging in unprecedented efforts to boost liquidity.

Batten down the hatches. The euro endgame nears.

• David Howarth is a Senior Lecturer in European Political Economy at the University of Edinburgh.

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The Tin Man

Monday, December 19, 2011 at 09:27 AM

5 Tibially Challenged Douglas Bader: At least Cameron is an English Tory, so the hysteria is not nearly as bad as it would be if he was Scottish, and a member of the Labour Party.

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Tibially Challenged Douglas Bader

Monday, December 19, 2011 at 07:56 AM

4 - Indeed Tin Man. It has already been proven that the Euro cannot work unless the stronger economies like Germany underwrite the poorer ones and as proven, Germany is not willing to do that so the Euro is doomed. The problem with the cybernuts on here is that rather than take a step back and looking at the whole picture regarding the Euro and the EU, they have launched a hysterical, Pavlov-like attack on Cameron and exposed their intellectual shortcomings.

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The Tin Man

Monday, December 19, 2011 at 12:45 AM

3 Moniker Lewinsky: Do you mean the EU or the Euro? The article is about the Euro. I think the EU will remain unchanged. As for the Euro, I think that a couple of countries may revert back to their national currencies. The real problem is that the governments taxpayers of a whole lot of European countries, and the US, are up to their eyeballs in debt. To be simplistic, the problems are solved by paying off the debts... You, and me, have been paying insufficient taxes for too much government stuff, for years, and years. You know what happens next. We can all blame Gordon Brown, or somebody, but at the end of the day, it is collectively our fault.

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Moniker Lewinsky

Monday, December 19, 2011 at 12:28 AM

If Europe is screwed then Scotland is screwed. We need Europe to work. That's just a basic fact that the Eurosceptics don't seem to understand.

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davieboy144

Sunday, December 18, 2011 at 01:21 AM

#1. sanctimonious urine. The Eurozone is run by France & Germany with the others bit part players. Everyone knows this, including wee, (who is a world famous economist BTW). Answer me this, if France, as part of a Eurozone tax raising programme decided it wanted to lower taxes on wine and raise them on whisky what would you suggest wee eck should do to protect Scottish exports?

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famous15

Sunday, December 18, 2011 at 12:45 AM

Enlightened Scots have known since the 17th Century that our future lies with friendship to Europe. Sweden,Netherlands,France and Germany have always provided Scots with greater intellectual rewards than the more xenophobic southron neighbours. I like France other than its airports. I feel relaxed in AmsterdaM. i JUST LOVE cOPENHAGEN. pERHAPS THE dAILY mAIL READERS SHOULD TRAVEL MORE!

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