Tuesday, December 13, 2011

Europe Enacts Treaty to Fix the Next Crisis; Does Nothing to Fix the Current Crisis

But Don’t Worry, the Economic Collapse after This One May Be Avoided – Or may Not, Who Cares at This Time

The Europeans do not want to solve their current crisis, because it would require the ECB to support the sovereign debt of nations that are in significant fiscal difficulty.  But they do want solve the next crisis.  So  by Germany and the current and prospective member of the Euro Group have approved a new treaty.

European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets.

Now a couple of things are of interest here.  One is that the Europeans already require fiscal discipline, so that problem is not standards, the problem is that the nations simply do not adhere to the standards.  The second thing is that the fiscal discipline imposed on Italy, Greece and other countries that are receiving fiscal help from the EU and ECB and IMF (don’tcha just love initials) has already been accepted by those countries. 

But Europe has to show that it is acting, that it is doing something about its problems even if the something has no immediate impact and the policy currently in place will make things worse, not better in the short term.  Austerity has been forced on Greece and Italy, and that will result in lower, maybe negative real growth in GDP.  There will also be higher unemployment and even higher unemployment among young people.

The British decided to count themselves out.  Britain  wanted exemption from major parts of the financial regulation imposed on the financial institutions that helped contribute to the crisis (Britain has a Conservative government in case you didn’t guess).  They didn’t get it.

The outcome was a significant defeat for David Cameron, the British prime minister, who had sought assurances to protect Britain’s financial services sector in exchange for doing a deal. President Nicolas Sarkozy of France said that “David Cameron requested something we all considered unacceptable, a protocol in the treaty allowing the U.K. to be exempted for a certain number of financial regulations

Britain has coalition partner, the Liberal Democrats, who support what the Europeans want to do, but in the past they have given up all of their principles in return for having a little bit of power in the coalition.  They have also caved on this issue.

The prime minister seemed to be betting that his unhappy coalition partners, the Liberal Democrats, would not bolt over the issue, and that calculation seemed to be right. On Friday, the party’s leader, Nick Clegg, said that as much as he regretted the turn of events, Mr. Cameron’s demands had been “modest and reasonable.”

Previously the Lib Dems have lost almost all of their support among voters for betraying their principles, and whatever support they had left will probably evaporate as the leaders of that party show what they are really made of.  (Both the Conservative party and the Liberal Dems have denied reports that the Conservatives have taught the Lib Dem leader, Mr. Glegg, to fetch).

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