Euro Drops Below $1,20 As E.U. Plans For New Stability Pact

The euro is currently trading at 1,198 against the dollar after diving to 1,187 at 4:57am CET Monday morning, the lowest since March 2006. The G-20 finance chiefs meeting in South Korea this weekend failed to agree on steps to ensure the strengthening the economic recovery. At tonight’s meeting in Luxembourg the E.U. leaders will discuss a new stability pact for E.U. – and new sanctions.

“The rules should include a gradual and automatic penalty system.”

E.U. Financial Task Force

According to a working draft obtained by Die Welt, the political leaders of E.U. is planing a rapid reform of the European Monetary Stabilization Act to gain control over the deficit problems. The new pact is likely to include concrete demands for targets on debt-to-GDP ratios, and new sanction mechanisms for those who fail to reduce their debt.

The proposals also include a strengthening of the role of the economics commission within the Commission, Die Welt writes, adding that Germany’s own balance budget law stands no chance to be implemented at euro zone level.

The draft is to be discussed at tonight euro-group meeting in Luxembourg, and tomorrow’s ECOFIN, according to which the big idea is a semi-automated sanctions mechanism that kicks in earlier than previously – and that includes concrete demands about targets for debt-to-GDP ratios.

Specifically, the EU plans to impose sanctions when they cross the debt limits set much earlier than before. After breaking the rules there should be a “gradual and automatic penalty system.”

This may also mean that an individual country must temporarily generate budget surpluses. If the interim to reduce total debt are not reached, they will be threaten by sanctions.

How the individual sanctions should look in practice, is in the position paper not listed. There is talk of a broad spectrum, including “included financial sanctions”.

In Olli We Trust

The proposals include a strengthening of the role of the economics commission within the Commission – to prevent others ganging up on the monetary commissioner Olli Rehn to push through their national interests.

He should be given a prominent role within the Commission, the draft says, suggesting providing the commissioner with the power to stop other EU commissioners to vote in certain decisions.

Some influential EU countries also require monitoring of households, but this will probably require a new authority and might cause more internal conflicts.

In addition to the budget deficit puts the total debt of a country in focus. There are now specific guidelines to reduce total debt.

The article also show how difficult it will be to extend policy co-ordination beyond the stability pact.

Silvana Koch Merin, a liberal MEP, says the proposal would effectively mean that other countries have influence on Germany’s economic policies – and was thus unacceptable.

On the ECOFIN agenda is also the agreement over the financial stability fund, after France and Germany had finally agreed on a proposal.

According to Les Echos the last points were the involvement of national parliaments and lending conditions.

The current agreement is that it does not require the national parliaments to authorize the funds (as wished by Germany, Austria, Finland and the Netherlands), but that it will be lend at market conditions.

Also today, Angela Merkel have invited Nicolas Sarkozy for a diner in Berlin; for a little group therapy session (La Croix) after divisions over how to handle the crisis, the reports.

Germany To Loose Influence – And Money

Politically, it is going to be extremely difficult for Germany to accept anything other than a souped-up stability pact, points out:

“To solve the problem of the euro zone, there is clearly a need for an end to absolute sovereignty over economic policies. The question must surely be how sovereignty can be effectively shared. Otherwise, international investors will invariable conclude that the E.U. has no effective agenda to deal with private sector imbalances, which have the biggest explosive potential. So this agenda is still consistent with a break-up of the euro.”

There’s also a risk that German tax payers will end up permanently paying billions for individual E.U. countries that are not as competitive as others, or operating with an irresponsible debt policy.

The political agreement on new euro rules are to be announce at the E.U. summit on June 17., Die Welt reports.

The Greatest Recession

The European Financial Task Force’s draft also include updated 2010 GDP estimates for the countries included in the euro zone.

Not a pretty picture:

Germany: -5,0%

The Netherlands: -6,3%

Belgium: -5,0%

Luxembourg: -3,5%

France: -8,0%

Italy: -5,3%

Ireland: -11,7%

Portugal: -8,5%

Spain: -9,3%

Malta: -4,3%

Greece: -9,3%

Cyprus: -7,1%

Slovakia: -6,0%

Austria: -4,7%

Slovenia: -6,1%

Finland: -3,8%

Chechnya : -5,7%

United Kingdom: -12%

Sweden: -2,1%

Denmark: -5,5%

Estonia: -2,4%

Latvia: -8,6%

Lithuania: -8,4%

Poland: -7,3%

Hungary: -4,1%

Romania: -8,0%

Bulgaria: -2,8%

Market Slide Continues

The euro is currently trading at 1,198 against the dollar after diving to 1,187 at 4:57am CET Monday morning, the lowest since March 2006.

The euro dropped 0.6%, to 109.39, versus the yen.

Asia stocks dropped the most in 15 months Monday, and commodities declined, after a smaller-than-estimated increase in American jobs led to a rout in U.S. equities Friday.

The Stoxx Europe 600 Index have now added 0.1%, recovering from a 1.7% drop this morning.

The oil price have  reduced its loss to 0.1 percent.

Yields on 10-year Treasuries is up 0.03 percentage point at the moment, to 3.23%.

Standard & Poor’s 500 Index futures expiring in June is up 0.3%, to 1,069.40, after falling 1.3 percent earlier today.

“There’s some better data out of Germany and there’s an absence of fresh bad news, allowing a bit of a recovery in risk,” Charles Diebel, head of sovereign strategy at Nomura International says to Bloomberg News.

“Equities are recovering and fixed-income markets have lost their shine. It’s more of a pause for breath than an outright reversal.”

Snap Shots




Related by the Econotwist:

E.U. Parliament To Investigate Euro Zone Bailout

Why Optimists Are Wrong About The Euro Zone

Bundesbank Suspects A French Conspiracy

S&P 500 Drops 3.4% On Disappointing Job Report

Election Farce Throws Iceland Into Political Chaos

Goodbye Keynes – Hello Ricardo!

Transantlantic Bailout Buddys Agree To Disagree

Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

European Banks: “Leman Times Ten”

Proposal For New Single European Bond

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7 responses to “Euro Drops Below $1,20 As E.U. Plans For New Stability Pact

  1. Conust

    sounds interesting, but no more than that

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  7. The EU Finance Ministers reached accord for the EFSF Monetary Authority to float Eurobonds to aid nations in sovereign debt distress on June 4, 2010.

    The Euro Stability Task Force, of European Finance Ministers, led by Herman Van Rompuy, president of the European Council, has reached agreement on the technical aspects of the special purpose vehicle, SPV, that would borrow up to 440 billion euros with euro zone country guarantees for euro members in trouble, according to sources quoted by Reuters in Friday June 4, 2010, article entitled Details Agreed For Euro Zone Loan Vehicle, with reporting by Jan Strupczewski and Julien Toyer.

    The rescue fund was originally agreed upon over a dramatic weekend of summitry on May 8th and 9th to ward off what many feared would be a Black Monday, May 10, with the euro imploding amid a chain reaction of sovereign debt default along the Mediterranean.

    The SPV is technically known as the European Financial Stability Facility, which is for all practical purposes, establishes a EU Treasury, for extending loans to nations experiencing sovereign debt distress.

    The SPV’s funding by Eurobonds, is going to be sovereign debt deflationary, financial institution deflationary, and price inflationary to the peoples and businesses of Europe for two reasons. First, the funding by EFSF issuance of bonds is tantamount to monetization of existing sovereign debt; and second, the purchasers of the bonds are likely going to be banks in Europe, which stimulates a speculative interest in purchasing lending institution credit default swaps and short selling of banking stocks.

    It is significant that the European Financial Stability Facility, will take national governments out of the equation: There would be no need for the SPV to ask national parliaments for approval of its actions each time it has to borrow, the sources said.

    Thus, we have a hierarchical authority for monetary seigniorage in Europe. This by definition establishes Economic Governance over the all countries which have agreed to the $440 Euro billion of funding. A “One Euro Government” was created on May 9th, 2010, by joint EU Finance Leader and State Leader announcement; and it will be funded by the SPV, the EFSF, located in Luxembourg.

    Thus a region of global governance, one of ten called for by the Club of Rome in 1974, has coalesced out of the European debt crisis. National Sovereignty is a principle of a bygone era; the will, way and the word of the Continent’s leaders is the law of the land which establishes regional economic governance as Sovereign. The leader of the EFSF, will be Europe’s Seignior, meaning as Elaine Meinel Supkis communicates, top dog banker who takes a cut off the top for the creation of money and establishment of credit. The effect is that one is no longer a citizen of a nation-state, but rather a resident in a region of global governance. A European wide sovereign debt crisis arose, and on May 9, 2010, constitutional and treaty law was superseded by announcement at a Summit of European Leaders of a broad Framework Agreement for European Economic Governance.

    According to the Reuters article, “the idea of the SPV emerged in May, as a way to help euro zone countries to which markets effectively refused to lend like recently in the case of Greece. But unlike in the case of Greece, it would be the SPV that would borrow on the market against guarantees issued by all 16 members of the single currency area. In Greece’s case, each of the euro zone countries has to go to the market and raise the money individually to extend bilateral loans to Athens”.

    If banks purchase the EFSF’s bonds, I have to ask where will the banks get the money? Probably from selling of assets, that is debts, to the ECB, for which they may have to take a loss if the asset is sold at market price and not their original and much higher cost. I have to question why a bank would do this? The answer comes back because of political pressure from the SPV, and the state’s Finance Minister. Only time will tell to what degree the European Financial Stability Facility is going to be successful selling what amounts to Eurobonds.

    At first, I thought that the ECB, would become the dispenser of funds. But then again, where politics is involved, there has to be a “bickering organization”, a “congress”, where loan decisions are hammered out in political process. The loaned money, as Elena Moya wrote in article How The EU Bail Out Will Work, is to come through a special purpose vehicle.

    Perhaps the EFSF’s powers will eventually go beyond the issuing of loans, and be a major force in the economic governance of Europe, with vetting of state parliament budgets, issuance of austerity measures, and application of sanctions for failure to reach assigned goals.

    Frankly, the idea of leveraging the collective credit worthiness of all Euro countries to provide funding for those who are not so credit worthy is utter nonsense, as most all are credit unworthy. We are witnessing the creation of debt at the most inopportune time as Debt Deflation Is Underway As Aggregate Debt Peaks Out And Stocks Fall Lower.

    As it stands now the proposal for establishment of the EFSF Monetary Authority and its issuance of Eurobonds will go for approval at the June 17th EU Finance Ministers Summit. Under global governance, task groups meet to propose policy, which is submitted to Leaders who announce Framework Agreements at Summits which become policy for governmental mandate; then stakeholders carry out the policy, and the people follow.

    As the Euro, FXE, and the European stocks, FEZ, and the European Financials, EUFN, continues to decline, I believe an authoritarian hierarchical government, a Sovereign and a Seignior will arise to rule Europe, and perhaps the world.

    Given the economic destructive nature of more debt, I suggest that one be invested in gold coins.