There’s almost no chance European leaders gathering in Brussels this week for a two-day summit in search of a cure for Europe’s long-running debt crisis will simply throw in the towel the way the Congressional ‘Supercommittee’ did last month in the U.S.
Global markets won’t stand for it.
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The strongest likelihood is that the group will announce some type of plan that creates a more centralized structure for imposing tighter fiscal discipline on participating eurozone nations.
In effect, an announcement Friday will almost certainly boil down to “an agreement to agree” on something down the road, said Peter Tchir, founder of TF Market Advisors in Connecticut.
Such a proposal would temporarily appease global markets hungry for evidence that Europe is at least moving forward toward a solution to a problem that has grown more severe with each passing month, as leaders have dithered and squabbled over what to do to contain the contagion.
The announcement will probably send stock markets soaring, as past headlines suggesting progress have. But held up to closer scrutiny, the plan will likely contain holes the size of a large European capital.
For instance, any agreement that seeks to implement a uniform plan for fiscal discipline across the eurozone would require the approval of not only the 17 countries within the European Union that share the single currency euro, but also the 10 countries that chose to remain outside the EU.
It would require, in fact, changes to the treaty that governs the EU, a process that would normally take years.
Europe doesn’t have years to fix its debt crisis.
There is widespread skepticism that such sweeping reforms can be agreed on by countries as disparate as booming Germany and faltering Greece in the short amount of time needed to ward off an outright catastrophe. “Such a short timetable for treaty change is ambitious. Past treaty negotiations have been long and arduous as member states have negotiated hard to protect and further their interests,” analysts at IHS Global Insight wrote in a research note.
The best-case scenario is that a soft agreement now to do something concrete later would provide the European Central Bank with the cover it needs to move ahead with plans to buy up bonds from deeply troubled countries such as Greece, Italy and Spain, providing much-needed liquidity to those battered economies.
The ECB has been reluctant -- so far -- to play a more aggressive role in any rescue efforts for fear of creating moral hazard, or in other words reducing the incentive for those debt-addled nations to impose difficult and unpopular austerity measures.
It’s a bit of a quid pro quo. The ECB isn’t likely to act without some encouraging news out of this week’s summit. So the participants will give them good news.
Tchir said global investors are solely concerned with a heightened role by the ECB, and not at all by potential changes to the EU’s treaty demanding greater fiscal discipline from wayward countries.
“Many EU leaders seem to actually believe that the treaty changes are important,” he said. “The reality is the market could care less about treaty changes. The market cares about only one thing -- that the ECB will announce new, bigger, more aggressive sovereign purchases. That’s all the market cares about.”
Tchir added: “The market believes that the treaty changes provide an excuse for the ECB and IMF to ramp up their efforts. The EU can do all the treaty changes it wants, but if it is not followed up with aggressive new printing policies, the markets will sell off.”
The Brussels summit has been viewed as a sort of deadline for solving the crisis. A sense of urgency has grown around the two-day meeting as French President Nicolas Sarkozy and German Chancellor Angela Merkel have floated proposals that might meet with ECB approval.
U.S. Treasury Secretary Timothy Geithner flew to Europe this week to meet with policy leaders, urging them to come together to reach an agreement.
On Monday, adding to the pressure, ratings firm Standard and Poor’s said all 17 members of the euro zone -- including economies such as Germany and the Netherlands previously viewed as healthy -- now face downgrades if a solution to the debt crisis isn’t reached in short order.
The warning was similar to one issued to the U.S. last summer shortly before Congress and the Obama administration failed to reach an agreement to reduce the escalating U.S. deficit. S&P followed through on its threat, taking away the U.S.’ AAA credit rating in early August, a historic move that sent global markets into a temporary tailspin.
European leaders are surely looking to avoid a replay of that situation. Whether they have the political will to do so will be known soon.