Towards a European sovereign solvency law
What’s at stake: Wolfgang Schäuble, Germany’s finance minister, will attend a full French cabinet meeting next week in a push to forge a common French and German front on proposals for eurozone governance. The two governments hope to reach agreement in time for the next meeting of the EU finance ministers’ task force, chaired by Herman Van Rompuy, European Council president, in September. According to an unconfirmed report in Der Spiegel magazine, the German plans would amount to a development of the EFSF, rather than an alternative. It would set up a “Berlin Club” to deal with insolvent states, organising the procedures for debt rescheduling and acting as an international guarantor.
Eurointelligence reports that Angel Merkel’s spokesman said that Germany would continue to press for a eurozone-wide insolvency law, as one of the lessons from this crisis. Wolfgang Schäuble said the issue remains firmly on the agenda of Herman van Rompuy’s task force, but there is no support for the setup of a “Berlin Club”, akin to the Paris Club, as all these changes would almost certainly require a change in the European Treaties, for which there is no appetite. There is now agreement on the introduction of “a European semester” – Brussels-speak for allowing the European institutions an early peak at national budgets, without prejudice to the prerogatives of national parliaments.
Naked Capitalism writes that the German proposal has all the hallmarks of being a trial balloon for domestic consumption. The idea that Germany or the creditor nations within the ECB can impose a regime that interferes with national sovereignty of EU member nations and violates current eurozone treaty arrangements is more than a bit of a stretch. And the restrictions on sovereignty would be considerable; democratically elected governments, even if they had nothing to do with the policies that led to fiscal deficits, would be stripped of their control over their own taxing and spending
Frankfurter Allgemeine reports that the van Rompuy task force will focus only on the minimal issues on which the eurozone can achieve consensus, which is the reform of the stability pact, and the inclusion of private sector imbalances in the calculations in its surveillance.
Shahin Vallée and Jérémie Cohen-Setton write in FT Alphaville that a credible EDRM should be an integral part of the eurozone governance overhaul. What is needed is not so much a specific debt restructuring plan for Greece but a credible and effective European sovereign debt restructuring mechanism (EDRM) to complete the governance reform of the eurozone. As it stands the current proposals for strengthening fiscal surveillance rely excessively on a flurry of centralised rules and sanctions which are unlikely to prove any more potent than the defunct Stability and Growth Pact. The EDRM, almost regardless of its technical application, would on the other hand have the advantage of reducing moral hazard not only for governments but also for market participants – making sure that, in the case of crisis, reckless lenders come to bear as much of the adjustment cost as irresponsible spenders. While France needs to recognise that the introduction of an EDRM is an essential part of the quantum leap forward regarding European Economic Governance, Germany will have to give up the draconian sanctions from its current proposals if it seriously wants this idea to progress.
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