December 4th, 2011
Updated 2:45pm December 4, 2011
Econintersect: Reuters is reporting tonight (Saturday, December 3) that German Finance Minister Wolfgang Schauble (pictured) has outlined a proposal that would create a process for all EU countries to work down their sovereign debt levels to 60% of GDP or less over 20 years. The proposal has been prepared for presentation to a summit meeting of EU leaders next week. Reuters indicates that German Chancellor Angela Merkel has given preliminary support to the plan.
The essential kernel of the plan is that each country would place the debt that is in excess of the 60% of GDP limit in a redemption fund pool for that country and it would be converted to a 20-year pay-off schedule. The remaining debt for each country would remain denominated in the existing array of Treasury securities for that country. The reason that the separation of the 20-year pools to each country is critical is that Germany has been adamantly opposed to the pooling of all national debts from across the EU into a common fund with common liability. France has favored such a pooling as step closer to a fiscally united EU.
Reuters says that there is some opposition to the German plan and mentions that Austria Finance Minister Maria Fekter has said that the plan would not be acceptable to voters because of the required tax increases.
Also Reuters reports that German leaders are remaining steadfastly opposed to any Euro bond issuance.
Update (Dec./4/2011): Gavyn Davies, writing in the Financial Times, says that the EU will move toward fiscal union this week and it will be on Germany's terms. Davies says that what is surprising about these developments is that they have received "such little examination." He sites lack of assessment by financial markets as one area where examination is lacking. That seems incongruous since the entire scamble over the recent months has been to "satisfy the markets" (Econintersect quote, not Davies.)
Here is how Davies summarizes the onging debate:
On the “soft” side of the debate, it is suggested that there was no mechanism in the treaties for fiscal transfers between the strong and the weak members of the euro, so the latter would receive no compensation for the disappearance of their ability to remain competitive by devaluing their currencies, or for their inability to cut interest rates during recessions. Lately, the “soft” side of the debate has added a new argument, which is that the ECB should assume a “lender of last resort” role in government debt markets, thus preventing self-fulfilling runs on sovereign debt. As a broad generality, France tends to take this line.
On the “hard” side of the debate, championed by Germany, none of these factors are given very much, if any, consideration. Instead, the flaw in the treaties is viewed as the lack of an effective mechanism to ensure fiscal discipline in the member states. The Stability and Growth Pact (SGP) was intended to limit budget deficits to under 3 per cent of GDP, and to reduce debt/GDP ratios to under 60 per cent. The treaties contained elaborate procedures to shift countries towards these objectives, but they were enforced only by peer pressure in the Council of Ministers, and they never worked. Therefore the “hard” line holds that new mechanisms are needed to ensure that the budget targets are in fact achieved, and that countries are penalised for failing to hit them.
Davies goes on to discuss the operational options and concludes that, with the "hard line" Germans winning the debate, the Eurozone will be locking into a fiscal regime that will require budgetary tightening, "come economic hell or high water."