The eurozone returned to the fore Monday (not that it ever left), with several finance-oriented headlines stealing the show. Here’s a brief roundup of the major stories.
Don’t call it a treaty
At their summit, Germany’s Angela Merkel and France’s Nicolas Sarkozy updated the world on the EU’s new budget agreement. Recall, all member nations (except Britain, which opted out on national sovereignty concerns) agreed on the framework (capping deficits at 3% of GDP and total debt at 60% of GDP) last month. But the details, like what penalties to impose on nations that break the rules, weren’t clear—and still aren’t. Merkel said negotiations are ongoing, and she expected all participating nations to sign the final agreement by March 1, but she didn’t say what, exactly, they’ll sign.
This prompted some to suggest the duo’s summit lacked substance and progress. To us, though, it seems like more of the gradual, measured approach their efforts to shore up the monetary union have taken thus far—not perfect but better, in our view, than a quick, ill-thought-out agreement for the sake of expedience. And we wouldn’t be surprised if they keep taking their time, perhaps delaying or watering down the final agreement if all 26 heads of state can’t agree on something useful by March 1. Expect politicking and talk of fecklessness to continue.
The Greek aid two-step
While the EFSF quietly conducted a smooth €3 billion auction of three-year debt to fund Portugal’s and Ireland’s upcoming bailout tranches, Greece’s needs are generating much more noise. Officials are again negotiating the release of the next installment from Greece’s 2010 bailout, and some question whether the country has reformed enough to warrant it. Greece’s government also continues negotiating voluntary debt haircuts with private creditors—an attempt to iron out the organized restructuring agreed to in 2011. Prime Minister Lucas Papademos claims if they can’t agree soon, Greece may have to exit the eurozone.
Together, these developments might give the impression Greece talks went south—but deeper analysis suggests it’s largely the same dance we’ve seen virtually every time Greece needs funding. EU/IMF officials use Greece’s dependency to extract further reforms, while Greek officials talk up the urgency to incentivize banks to agree to terms (and try to soften the political blowback of unpopular austerity). What else hasn’t changed? All sides still appear willing to do what’s needed to mitigate the risk of disorderly default. Austerity and privatization continue in Greece, banks seem open to larger haircuts than the initially outlined 50%, and EU leaders are already exploring how to boost the European Stability Mechanism (the EFSF replacement fund, which could help provide for Greece’s longer-term needs).
That taxing Tobin tax
The eurozone’s financial transaction tax reared its ugly head again as Sarkozy announced he’s prepared to enact it in France regardless of what broader Europe decides. Merkel was a bit more hesitant, saying she preferred all countries figure out a common policy over the next several weeks.
Why the disconnect, given both leaders seemed equally in favor of the tax until now? In a word, politics. Merkel’s government is divided over the issue, and her coalition looks increasingly tenuous. Her main partner, the pro-business Free Democrats, is in disarray, and trying to ram a new tax through the Bundestag now could further complicate matters. Meanwhile, Sarkozy is waging an uphill re-election battle against Socialist François Hollande, who leads in the polls. By going it alone on the tax now, he may be trying to steal some of Hollande’s momentum and populist thunder.
In our view, this story is most noteworthy politically—it’s a timely anecdote of how eurozone leaders’ domestic interests can play tug-of-war with eurozone policy aims. The biggest loser from the tax would likely be the eurozone economy as investment capital is deployed less efficiently or leaves the eurozone altogether in search of less hostile environs. But the eurozone’s loss would likely mean gains elsewhere, and the UK—which would likely reap most of the knock-on effects—still refuses to adopt it.