Posted by: David Tweed on January 23, 2012
Euro zone finance ministers meet in Brussels today and it looks as though they’re certainly listening to one of Italy’s two Marios.
European Central Bank President Mario Draghi suggested after the bank’s January meeting that it would be “highly welcome” for European leaders to quit dithering and get the proposed fiscal-compact treaty on fiscal discipline and balanced budgets signed by the end of January.
A couple of days later Germany’s new ECB representative Jörg Asmussen, after catching sight of a treaty draft, warned against moves afoot to water it down. If the pact was to be a basis for a fundamental shift toward fiscal union, then it needed credible rules, with limited opt-outs.
Lo and behold, last week a new, stricter treaty surfaced, one with rules that will automatically fine countries breaching their budget-deficit targets, except in the direst of circumstances.
So momentum is gathering. But even if the compact gets a political blessing this month, will that be enough to put an end to the European sovereign debt crisis?
“Probably not,” said Michala Marcussen, head of global economics for Société Générale (GLE:FP). “The really big issue is getting more money on the table.”
Enough money to convince investors that the EU can and will come to the aid of an economy the size of Italy if necessary. And keep Greece out of the bond market until it can generate a budget surplus, which could take years.
Which brings us to the other Mario, Italian Prime Minister Mario Monti, who has called on Germany to cut Italy some slack and bring down its borrowing costs.
How? With the ECB averse to becoming the ultimate lender to distressed governments, Germany’s Chancellor Angela Merkel may be forced to increase the size of the permanent rescue fund from the proposed €500 billion and create a credible firewall—with all the political risk that entails.
For today, as well as the fiscal compact, finance ministers also must prepare a response to Greece’s efforts to convince private bond holders to take losses and assess its second financing package ahead of the Jan 30 leaders’ summit.
One step at a time. As Merkel is wont to say: this crisis won’t be solved with one big bang.
Photograph by John Thys/AFP/Getty Images