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Franco-German secret negotiations for new euro contract

Die Welt has all the big stories this weekend. I just reported on the news that Eurobonds are on the table despite repeated official denials. Now we learn that German Chancellor Angela Merkel and French President Nicolas Sarkozy are working on a secret plan to present to the EU heads of state summit on 9 December. According to Die Welt’s Sunday edition, Welt am Sonntag, this proposal will include bilateral aid support from 9 countries in order to short circuit the cumbersome and unanimous treaty change route to getting the fiscal union Merkel has said she wants.

Note, despite reports in the English-language press that Die Welt originated this story, the article clearly states that German tabloid Bild Zeitung is the origin of this story, with a link to the Bild story.

German translation:

Germany and France want to force a new euro stability agreement at record pace, if possible by January or February 2012. The "Bild" Zeitung reported this, citing diplomatic sources.

According to these sources, Chancellor Angela Merkel (CDU) and French President Nicolas Sarkozy are considering closing the new stability pact first as a contract between nation states – similar to the initial agreement on the abolition of checks of persons in the EU ("Schengen Agreement").

Merkel and Sarkozy would overlook the traditional role of the EU Commission if necessary. The duo want to introduce their plans at the next EU summit on 8 / 9 December already. Strong protest is expected mainly from Great Britain, which although not part of the euro zone, does not want to be further sidelined.

Merkel and Sarkozy had announced on Thursday their intention to present a total package to stabilize the euro-zone in the coming days. A central part of the package should be an EU treaty change, with which much closer cooperation and control in the common currency area would be enforced.

Note that these stories about eurobonds and bilateral government aid agreements ran on the same day that Welt am Sonntag’s editorial proclaimed Eurobonds? Hold the line, Mrs. Chancellor and two prominent articles were headlined Industry backs Merkels no to Eurobonds and Germans support Merkels course in the euro crisis.

The last article says Merkel has seen her crisis favourability rating rise 18 points to 63% since the beginning of October. This is probably attributable to her hard line on debt, deficits and Eurobonds. So we can see that the German press and electorate are firmly against these kinds of deals despite reporting them.

Boxed in by the ever-worsening sovereign debt crisis, the Franco-German euro zone axis is trying to formulate a policy that both adheres to the German economic orthodoxy without worsening the crisis any further.

Source: Geheimverhandlungen über neuen Euro-Vertrag – Die Welt

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

8 Comments

  1. Raskolnikov says:

    Merkel is always blabbering about budget discipline, but I’m beginning to think its all a smokesrceen to conceal her real intention–to create a euro-government without getting public approval via the democratic process (referenda) Already, today Reuters had a story about restructuring without haircuts for bondholders. (It sounds like germany is on board) And now it’s this baloney about an emergency stability pact that circumvents the EU commission, the German courts, the will of the people, or the Lisbon Treaty!

    How do ya like them apples?!?

     Merkel is just winging it on some grand scam that will let the ECB do whatever the hell it wants to, and there will also likely be some kind of eurobond that will be dolled up as something else. (Let the public relations guys handle it) 

    Merkel is just like the rest of the globalist scum who try to sound like nationalists when they’er really doing “god’s work”, if you catch my meaning.

  2. Raskolnikov says:

    Merkel is always blabbering about budget discipline, but I’m beginning to think its all a smokesrceen to conceal her real intention–to create a euro-government without getting public approval via the democratic process (referenda) Already, today Reuters had a story about restructuring without haircuts for bondholders. (It sounds like germany is on board) And now it’s this baloney about an emergency stability pact that circumvents the EU commission, the German courts, the will of the people, or the Lisbon Treaty!

    How do ya like them apples?!?

     Merkel is just winging it on some grand scam that will let the ECB do whatever the hell it wants to, and there will also likely be some kind of eurobond that will be dolled up as something else. (Let the public relations guys handle it) 

    Merkel is just like the rest of the globalist scum who try to sound like nationalists when they’er really doing “god’s work”, if you catch my meaning.

  3. Anonymous says:

    A zero haircut option for bond holders is simply extend and pretend, no matter how you present it. The overwhelming problem is excessive debt and guaranteeing bondholder debt with an austerity package is a route to disaster. The nations impacted will have soaring debt burdens and will eventually collapse. The deeper and more savage the haircuts the faster they can recover. There is nothing here that resolves the excess debt problems for any of the nations. 

  4. Anonymous says:

    A zero haircut option for bond holders is simply extend and pretend, no matter how you present it. The overwhelming problem is excessive debt and guaranteeing bondholder debt with an austerity package is a route to disaster. The nations impacted will have soaring debt burdens and will eventually collapse. The deeper and more savage the haircuts the faster they can recover. There is nothing here that resolves the excess debt problems for any of the nations. 

  5. Asbytec says:

    I see euro bonds as the best solution to the “more Europe” concept of monetary union, it should allow a central funding facility (presumably the EFSF/ESM) to take on a quasi Treasury role. It’s quite possible Germany will pay higher rates than normal, and by normal I mean prior to the crisis. Anyway, the concept of a union is “we all take a bite from the sandwich” for the greater good. That means Germans bite it on rates and PIIGS on austerity.

    Now, to find some buyers. Who might be interested in a package deal including toxic peripheral debt and stronger German and French debt, increasingly under pressure, in a securitized package? I am sure the IMF, who always get repaid – remember, would jump in. Would China or other BRIC nations? How about the US, even if indirectly by providing funding the the IMF? Maybe, but short of ECB printing, this is their best hope of funding the Eurozone without addressing the problems of the fixed currency. And one can only hope the failed EFSF auction is not a prelude of things to come.

    Anyway, if the word is out and Greece get’s wind of it, look for 75% haircuts and easing back form austerity, I guess. Seems the technocratic government is using it’s technocratic knowledge to best effect. I dunno, jawboning will probably rally the euro on rumor soon enough and maybe sell off on the news later.

    • Asbytec says:

      [quote]“Franco-German euro zone axis is trying to formulate a policy that both adheres to the German economic orthodoxy without worsening the crisis any further.”[/unquote]

      Yea, that’s the rub. Not sure the two concepts are compatible. In the meantime, it seems Draghi is calling for “implementation,” gesturing with one hand in the air and his other hand on the printing press trying not to turn the euro into a printable, soft currency IOU. Delays in implementation may cause him to pull the switch to save the euro.

  6. Asbytec says:

    I see euro bonds as the best solution to the “more Europe” concept of monetary union, it should allow a central funding facility (presumably the EFSF/ESM) to take on a quasi Treasury role. It’s quite possible Germany will pay higher rates than normal, and by normal I mean prior to the crisis. Anyway, the concept of a union is “we all take a bite from the sandwich” for the greater good. That means Germans bite it on rates and PIIGS on austerity.

    Now, to find some buyers. Who might be interested in a package deal including toxic peripheral debt and stronger German and French debt, increasingly under pressure, in a securitized package? I am sure the IMF, who always get repaid – remember, would jump in. Would China or other BRIC nations? How about the US, even if indirectly by providing funding the the IMF? Maybe, but short of ECB printing, this is their best hope of funding the Eurozone without addressing the problems of the fixed currency. And one can only hope the failed EFSF auction is not a prelude of things to come.

    Anyway, if the word is out and Greece get’s wind of it, look for 75% haircuts and easing back form austerity, I guess. Seems the technocratic government is using it’s technocratic knowledge to best effect. I dunno, jawboning will probably rally the euro on rumor soon enough and maybe sell off on the news later.

    • Asbytec says:

      [quote]“Franco-German euro zone axis is trying to formulate a policy that both adheres to the German economic orthodoxy without worsening the crisis any further.”[/unquote]

      Yea, that’s the rub. Not sure the two concepts are compatible. In the meantime, it seems Draghi is calling for “implementation,” gesturing with one hand in the air and his other hand on the printing press trying not to turn the euro into a printable, soft currency IOU. Delays in implementation may cause him to pull the switch to save the euro.

  7. frank c says:

    The now rumored $600 billion loan from the IMF to Italy undermine this treaty proposal. By bringing in the IMF this brings the US, Japan, China and rest of the world’s checkbook to the table thereby giving Germany and France and the ECB a hugely significantly lower contribution with less liability.

    None of these proposals affect the long term problem of economic growth, deficit trade accounts, wage disequilibrium nor do they reduce their debt/GDP ratios in these countries.

    If the IMF comes to the rescue Italy and the others will not need to grant the EU control over their budgets. Austerity will be more determined by the IMF which will be more tolerant than the Germans.
    If the IMF loans Italy 600 Billion, Spain will follow immediately. The Irish will come back to renegotiate their deal. Hungary and Portugal will be at the feeding trough as well. With Belgium close behind. The IMF will need in excess of 1 trillion euros. Of which the USA taxpayer will be on the hook for a minimu 17% or about $220 billion (1.32 exchange rate). 

    Grover Norquist and the republican primary candidates will be all over this. Not to mention the Occupy Wall Street crowd. I do not beleive that the increased US contribution to the IMF can be made through the Federal Reserve Bank. I beleive this may have to come through the US congress as an appropriation. Good luck with this based on the Super committee and the pending unemployment extension and payroll tax cut extension 

    This IMF plan not only bails out Italy, Spain, et al but now shifts to essentially bailing out France and Germany from their EU/ESFS/ECB obligations.

    The Brits will also not follow suit. They are not part of the Euro but are members of the EU and will not want to give their budget to be controlled by Brussels.

    Most importantly these future budgets would have to approved by the EU before being sent to their respective sovereign governments for vote. This would effectively neuter most politicians in all countries. And at the end of the day some aspiring politician will sue and litigate that the treaty is illegal as a lever to a stronger political base. We have already seen how the German Supreme Court rules on these matters.

    The only real solution for the debt/banking crisis is for certain members of the Eurozone to leave the Euro and default. They can then write their debt down by 50-70% and create a new currency that will reflect their instability and change the way institutions invest and perceive a risk free return.

    Or in the alternative raise taxes in these countries and sell national assets to reduce their debt. Loaning them money only kicks the can further down the road. 

    • John Haskell says:

      In the past Congressional approval has been needed for the US to lend $ to the IMF or increase the US quota.  However if Merkozy can secretly cook up a new EU treaty for ambushing on Dec 9 all bets are off.  god forbid Merkozy’s lawyers and PR guys meet up with Geithner, we will have loaned the Italians $1 trillion before you can whistle the overture to Cavalleria Rusticana

  8. frank c says:

    The now rumored $600 billion loan from the IMF to Italy undermine this treaty proposal. By bringing in the IMF this brings the US, Japan, China and rest of the world’s checkbook to the table thereby giving Germany and France and the ECB a hugely significantly lower contribution with less liability.

    None of these proposals affect the long term problem of economic growth, deficit trade accounts, wage disequilibrium nor do they reduce their debt/GDP ratios in these countries.

    If the IMF comes to the rescue Italy and the others will not need to grant the EU control over their budgets. Austerity will be more determined by the IMF which will be more tolerant than the Germans.
    If the IMF loans Italy 600 Billion, Spain will follow immediately. The Irish will come back to renegotiate their deal. Hungary and Portugal will be at the feeding trough as well. With Belgium close behind. The IMF will need in excess of 1 trillion euros. Of which the USA taxpayer will be on the hook for a minimu 17% or about $220 billion (1.32 exchange rate). 

    Grover Norquist and the republican primary candidates will be all over this. Not to mention the Occupy Wall Street crowd. I do not beleive that the increased US contribution to the IMF can be made through the Federal Reserve Bank. I beleive this may have to come through the US congress as an appropriation. Good luck with this based on the Super committee and the pending unemployment extension and payroll tax cut extension 

    This IMF plan not only bails out Italy, Spain, et al but now shifts to essentially bailing out France and Germany from their EU/ESFS/ECB obligations.

    The Brits will also not follow suit. They are not part of the Euro but are members of the EU and will not want to give their budget to be controlled by Brussels.

    Most importantly these future budgets would have to approved by the EU before being sent to their respective sovereign governments for vote. This would effectively neuter most politicians in all countries. And at the end of the day some aspiring politician will sue and litigate that the treaty is illegal as a lever to a stronger political base. We have already seen how the German Supreme Court rules on these matters.

    The only real solution for the debt/banking crisis is for certain members of the Eurozone to leave the Euro and default. They can then write their debt down by 50-70% and create a new currency that will reflect their instability and change the way institutions invest and perceive a risk free return.

    Or in the alternative raise taxes in these countries and sell national assets to reduce their debt. Loaning them money only kicks the can further down the road. 

    • John Haskell says:

      In the past Congressional approval has been needed for the US to lend $ to the IMF or increase the US quota.  However if Merkozy can secretly cook up a new EU treaty for ambushing on Dec 9 all bets are off.  god forbid Merkozy’s lawyers and PR guys meet up with Geithner, we will have loaned the Italians $1 trillion before you can whistle the overture to Cavalleria Rusticana