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 eurointelligence.com 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, eurointelligence.com 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:
The Netherlands: -6,3%
Chechnya : -5,7%
United Kingdom: -12%
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.”
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