GENEVA, SWITZERLAND – “Towards a Genuine Economic and Monetary Union”, a blueprint for the economic future of the European Union, was released to something short of enthusiasm late Tuesday 26 June. The paper was presented in the run-up to Thursday’s euro summit in Brussels that is receiving early obituaries from some corners, while other world media say its do-or-die role is overblown.
It was presented by European Council President Herman Van Rompuy, but the document, which calls for a European treasury that would have control over members’ budgets, is the joint creation of the European Commission, the Eurogroup and the European Central Bank.
The paper follows, by a week, remarks by the Basel-based International Bank for Settlements in its annual report published 24 June, that “Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.”
Merkel no to eurobonds
German Chancellor Angela Merkel reacted to the eurozone paper by with an absolute no to eurobonds: “saying total debt liability would not be shared in her lifetime and giving little support to Italian and Spanish pleas for immediate crisis action”, reports fin24.
But AFP reports that the leader of Europe’s largest economy is increasingly isolated in her refusal to consider “demands for pooling eurozone debt in the shape of eurobonds or allowing bailout funds to help stricken banks”.
Italy now world’s fourth-largest sovereign debtor
The meeting comes as several signs are appearing that Europe’s economic crisis is far from resolved. Reuters reports that “Italy’s six-month borrowing costs neared 3 percent at auction on Wednesday, their highest since December, piling pressure on the government as it pushes for concrete steps to ease market tensions at a European Union summit later this week” with doubts “growing on Italy’s ability to keep funding its 1.95 trillion euro debt, which makes it the world’s fourth-largest sovereign debtor”.
The world’s oldest bank, Monte dei Paschi in Tuscany, was awarded state aid of nearly 4 billion euros Tuesday.
Cyprus latest EU troubled debtor
Cyprus this week became the fifth eurozone country to ask for help with its debt.
Shares are up in trading but the euro is flat and, more worrying, according to Forbes, “the European sovereign debt crisis has entered a new phase marked by capital flight, not just into bunds, but out of Eurozone assets.”
Basel’s BIS says vicious cycle of debts must end
The BIS in Basel, which serves as a central banker to monetary policy-makers, in its annual report issued Sunday notes that “governments, with their deteriorating creditworthiness and need for fiscal consolidation, are hurting the ability of the other sectors to right themselves. And as households and firms work to reduce their debt levels, they hamper the recovery of governments and banks. All of these linkages are creating a variety of vicious cycles.”
“Central banks find themselves in the middle of all of this, pushed to use what power they have to contain the damage: pushed to directly fund the financial sector and pushed to maintain extraordinarily low interest rates to ease the strains on fiscal authorities, households and firms. This intense pressure puts at risk the central banks’ price stability objective, their credibility and, ultimately, their independence.”
“Breaking the vicious cycles, and thereby reducing the pressure on central banks, the BIS says, is critical. It can be accomplished by “cleaning up and strengthening banks at the same time as the size and riskiness of the financial sector are brought under control. … Only then, when balance sheets across all sectors are repaired, can we hope to move back to a balanced growth path. Only then will virtuous cycles replace the vicious ones now gripping the global economy.”
