What do I think happened on 9 December?
The Eurozone countries +9 EU members have agreed to draft a new treaty to strengthen the Euro stability pact through tougher and enforceable rules. A debt break along the German model will be introduced and all countries agree to work towards balance budgets. There will be EU monitoring of the individual budgets and deficits and semi-automatic sanctions.
Britain did not join this approach as the only EU member which means that the treaty has to be agreed outside the existing EU treaty along the Schengen treaty model. This makes it all more complex and cumbersome but still a feasible 2nd best option.
A game changer? Let’s see.
The good news
Finally, this was a more serious summit with real decisions.
The agreed fiscal compact and its enforceable rules are a first important part and start of a process towards a European fiscal and economic union.
The EU acted and it acted together with a strong voice, apart from the UK.
The German-French engine worked again, not beautifully but delivering impact.
The ECB President reacted positively to the outcome and indicated that he would support its implementation within the mandate of the ECB, of course. This can be interpreted that the ECB will continue to buy national state bonds and ease the debt reduction pain in the intermediary period.
The bad news
Decisive this step may be, but is it in the right direction? Many, including SPD and Grüne, think not. The summit decisions focus on long term fiscal discipline but do little in the short term. On the contrary, the agreement to jointly reduce state deficit in the middle of a crisis, will most likely exaggerate recession tendencies, increase unemployment and potential social unrest.
The summit neglected the short term needs. The European South needs a growth plan and not a savings plan. This is the lesson from the 1930s.
The opt-out of the UK is bad news for both the UK and the EU. The EU needs a third strong player to balance Germany and France and to present interests from the Eastern and Northern members. The UK will lose influence in Europe and potentially in the European single market. Internal separation tendencies between Scotland and England may accelerate.
On balance
It was important that the EU has started to act decisively, even if it was not yet the Big step ahead of the curve and may not even be in the right direction.
Much depends on how the ECB will react and help fund the painful reform process in the EU.
The summit decisiveness and the ECB flexibility could together recreate confidence of the market which is key indicator for whether it will work.
A next step must be a European Marshall (Growth) Plan, otherwise we will slide into recession with all its unpredictable economic and social consequences.
The UK is isolated now, but should be offered the possibility to join at any stage in the treaty drafting process so that it may be possible for the UK to join back later on.
It’s almost Christmas, I want to be optimistic.
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