December 9 is shaping up to be another of those EU Summits in which a final plan or resolution to the sovereign debt crisis is presented. The broad outlines of a deal are becoming apparent as we have major players including Angela Merkel, Nicolas Sarkozy, Mario Monti, Mario Draghi and Herman Van Rumpoy articulating the same points of late.
The main theme pushed by Germany has been to create tighter fiscal integration of euro zone countries - including peer review budget deficits, automatic debt breaks and sanctions for countries that don't follow fiscal rules. This would enshrine a blueprint for "fiscal union" that would give stability to the Euro-zone over the long term.
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ECB Willing to Step Up Effort if Countries Agree on Fiscal Union Steps
Until this step is accomplished it will be nigh impossible to convince Germany to allow the ECB to become a lender of last resort or to increase its contribution to bailout funds.
Once these treaty changes are in place the focus turns to reforms of national governments including Italy's plans for austerity. The package that Mario Monti is presenting, scheduled for December 5, should try and win back some confidence of bond markets.
With these two central planks in place - changes to enshrine close of the school integration as well as renewed vigor in wayward countries cutting their debt loads - then the ECB may be more willing to step up its role in fighting the crisis - including helping to build a firewall that is strong enough to stop the spread of contagion.
ECB President Draghi said as much yesterday in a speech to the European Parliament mentioning that the "sequence" of events matters.
"Other elements might follow, but the sequencing matters," he said. "And it is first and foremost important to get a commonly shared fiscal compact right."
Sarkozy For Tighter Fiscal Rules, But Not In Favor of Supranational Control
In a speech yesterday, Sarkozy attempted to convince a primarily domestic audience that treaty changes would be necessary but was reluctant to cede his countries sovereignty to supranational institutions,
"It is not by going down the path of more supranationality that Europe will be relaunched." Stricter central budget discipline would involve "common examination of our budgets" and "the establishment of the more rapid, the more automatic and the more severe sanctions for those who do not respect their engagements". He said France was working with Germany on a new EU treaty to achieve "more discipline and more solidarity" in economic governance.
Merkel Points Out That Resolution of Debt Crisis Will be a Marathon
From Financial Times: "France and Germany will to seek finalise their proposals for treaty change in the European Union on Monday, she told the German parliament on Friday, insisting that only fundamental reforms to reinforce budget discipline and curb government borrowing would deal with the causes of the crisis.
The chancellor insisted future budget rules of the eurozone must be legally enforceable through the European Court of Justice, and sanctions to discipline countries that failed to observe budget discipline should be automatic - two issues on which France and Germany have yet to agree.
We therefore have the outline for what's next.
France and Germany will give their proposals at the beginning of next week, we awaits the announcement of austerity measures from the Italian government, we see if treaty changes will in fact be enshrined up during the December 90 EU summit, and then we see what type of stepped-up role the ECB is willing to take once politicians agree to tie in fiscal integration.
Will Europeans inevitably disappoint the market? We'll know soon enough.