EU Leaders At October 28, 2010 Summit Assign EU Council President Herman Van Rompuy To Design Sovereign Debt Default Procedures By Tweaking The Treaty

I  … Introduction

The European Leaders, are striving to make European Economic Governance more effective.  They have assigned Herman van Rompuy the task of preparing the legalities and procedures for a nation’s sovereign debt defaultUnder global governance, task groups work to resolve regional issues and then present their recommendations to state leaders, who then meet in summits and announce framework agreements, setting forth regional governance, which supersedes national legislatures, national constitutions and all state law. The announcements of the region’s leaders effectively waives national sovereignty. The word, will and way of the leaders  is sovereign, in this case, the law for all Eurozone treaty participants. One is no longer a citizen of a sovereign state, rather one is resident living in a region of global governance.  I raise several  questions: should economic conditions devolve to such an extent that sovereign debt default is necessary, will that nation, by default, have to leave the EU currency union? And if so, will it have sufficient seigniorage authority to issue bonds? And if not, will seigniorage aid be forthcoming from some source. I see the day coming in the near future when Portugal, Italy, Ireland, Greece and Spain, will all default on their sovereign debt, and at some time thereafter, I believe a Global Seignior will provide a global currency system, that is a world-wide credit system to conduct economic transactions as many nations will have lost their sovereign debt seigniorage. As it stands today, Pagter Tenebrarum in Credit Watch October 29, 2010 article reports of Renewed Trouble for Greece, Portugal and Ireland – Irish Bonds become ‘Confetti in the Winds’.  And Political analyst Giorgos Kirtsos is quoted by Le Figaro,  reacting to yesterday’s announcements, that the estimates on Greece’s public deficit will be reviewed up to 15% from 13.6%.  “It is impossible to pay back the €110 billion borrowed from the EU and the IMF in only three years. We will have to restructure our debt”, he argues.

II … The Global Europe Morning Brief of October  29 2010 reports on the conclusion of the Task Force on Economic Governance:  EU summit, day one. Press reports: New York Times: “European Union Tightens Rules Governing Euro”, here; Guardian: “Angela Merkel struggles to win support for EU bailout rules at Brussels summit”, here; EU Observer: “EU leaders give green light to tweak treaty”, here. Watch the press conference with Van Rompuy and Barroso last night here. Van Rompuy’s remarks to the press here.

III … Leigh Phillips of the Eu Observer reports on the EU Leaders Summit Of October 28, 2010: “Heads of state and government agree on the need for member states to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole and invite the president of the European Council to undertake consultations with the members of the European Council on a limited treaty change required to that effect,” the draft conclusions of a two-day summit in Brussels read.

Ms Merkel’s government, leading the economic powerhouse and top EU paymaster, is also confronted with a population averse to being left with the tab for further debt disasters elsewhere in the eurozone.

A set of clearly defined default procedures would signal to investors that they, rather than taxpayers alone, would be on the hook for at least part of the costs of the bankruptcy of a country. Such a mechanism would also be designed to deal with sovereign defaults without setting off a cascading panic in the markets similar to the Greek debt crisis that shook Europe in spring.

“No country is opposed in principle to a moderate treaty change but they want to know what the political and legal consequences of this would be,” said one source close to the discussions.

Two moves have been tentatively agreed. EU Council President Herman Van Rompuy is to be tasked with exploring whether such a limited change can be done via a simplified revision procedure, in which EU leaders can make the change without having to call a full Intergovernmental Conference (IGC) – involving negotiations between the governments, consultations with the European Parliament and the participation of the European Commission, which could open a Pandora’s Box of other new proposals.

Mr Van Rompuy would also explore whether legally this can be done without the tweak having to be presented to national parliaments for approval, which would almost certainly grind down the process, or even further, whether such a move would provoke referendums in some countries, notably Ireland, which maintains a constitutional requirement that any shift in powers from Dublin to Brussels be approved in a vote by the people.

He would report back to the European Council in December.

The European Commission meanwhile is to be tasked with fleshing out the details of the structure of a permanent bail-out fund and crisis resolution procedures – a ‘crisis management mechanism’.

IV … BBC News reports EU leaders Clinch Pact To Defend Euro: EU leaders say tough new budget rules agreed at their summit in Brussels will protect the euro from a future Greek-style debt crisis.

The EU “sealed a solid pact to strengthen the euro,” said European Council President Herman Van Rompuy.

A permanent fund will be set up to bolster the euro in times of crisis, and the EU will have extra powers of scrutiny over national budgets.

A 2.9% limit on the EU budget increase was also agreed, under UK pressure.

But tough negotiations are expected with the European Parliament, which voted for a 5.9% rise. If no deal is reached by mid-November the 2011 budget will be frozen at the 2010 level.

EU officials said the eurozone had almost collapsed during the Greek debt crisis in May because it lacked a rescue mechanism.

  • Permanent mechanism to replace temporary emergency fund which expires in 2013
  • Tighter EU surveillance of all 27 national budgets
  • Cumulative sanctions, including fines, for countries that exceed EU’s agreed deficit or debt limits
  • Sanctions apply to 25 countries – either in eurozone or planning to join (so UK and Denmark not included)
  • Part of Lisbon Treaty to be changed to make mechanism legally watertight

  • Q&A: EU crisis mechanism
  • Germany wants limited changes to the EU’s Lisbon Treaty to reinforce the changes, but is facing resistance from other countries.

    The leaders will return to Brussels in December, hoping to agree upon any revision, which it is hoped will be ratified in all EU countries by mid-2013.

    Meanwhile, UK Prime Minister David Cameron won backing for his battle against a 5.9% rise in the EU budget.

    Germany and France were among 10 nations supporting Mr Cameron’s attempt to limit the budget increase to 2.9% – a rise that would still cost UK taxpayers roughly £435m (500m euros).

    “Now we have agreed that the EU budget must reflect what we’re doing in our own countries,” Mr Cameron said, describing the deal as “incredibly important”.

    He will have further talks with German Chancellor Angela Merkel at his Chequers residence on Saturday.

    The bigger prize for Mr Cameron would be a deal to keep the UK’s hard-won budget rebate, as difficult talks loom on the EU budget period beyond 2013.

    The BBC’s Jonty Bloom, in Brussels, says the new crisis mechanism is designed to force a country to put its house in order long before its economic problems threaten the eurozone.

    Under the rules, EU officials will warn governments about property and speculative bubbles, and will be able to impose stringent fines on countries that borrow and spend too much.

    The permanent crisis fund will replace a temporary one, worth 440bn euros, which expires in 2013. It was created earlier this year to bail out Greece and support the euro.

    But Germany has argued that the Lisbon Treaty will have to be amended to make the emergency fund permanent and legally watertight.

    The current treaty contains a clause banning members from bailing each other out.

    Chancellor Merkel said all the leaders agreed that creating a permanent crisis mechanism “will require a limited treaty change”.

    It took almost a decade of hard negotiations and two referendums in the Republic of Ireland to ratify the Lisbon Treaty, and many states are reluctant to make a move which could trigger a similar process.

    The EU Constitution – the treaty’s ill-fated forerunner – was rejected by voters in France and the Netherlands.

    Mr Van Rompuy has been tasked with finding out whether the fund can be set up without each of the 27 member states having to ratify the treaty all over again.

    The UK says a mechanism to ensure stability in the eurozone is desirable – and that the planned sanctions would not apply to the UK.

    But all 27 member states’ budgets will come under close scrutiny in a “peer review” process.

    There would be escalating sanctions on countries which overshot the maximum debt level allowed under the EU’s Stability and Growth Pact (SGP), which is 60% of GDP.

    Sanctions would kick in earlier than is the case under the current SGP, enabling the EU to take preventive action, for example against a country with an unsustainable housing bubble, or with mounting debt that undermines its competitiveness

    V …  OpenEurope Press Summary of October 29, 2010 reports: Le Figaro suggests that the changes could be adopted through the Lisbon Treaty’s “simplified procedure”, meaning that the amendments would be adopted by unanimity within the European Council bypassing the ratification process through national parliaments or potential referendums.  Swedish Prime Minister Fredrik Reinfeldt is quoted by Deutsche Welle saying, “Many countries do not want a huge treaty reform, and therefore we are trying to narrow it down to a very limited treaty change that should be acceptable for countries without having to face referendums.”

    On his BBC blog, Gavin Hewitt argues, “[David Cameron] is instinctively opposed to treaty change for another reason. Some of his backbenchers may see it as an opportunity to try and claw back some powers to London.” However, Die Welt reported last night that Cameron agreed to back the treaty changes in return for Chancellor Merkel’s support for capping next year’s EU budget increase at 2.9%.

    On Conservative Home, Open Europe’s Director Mats Persson argues, “If true, Cameron may well have severely underplayed the UK’s hand, missing the opportunity to get real concessions in return for treaty change. A one-year 2.9% as opposed to 5.9% budget increase, though important in face of budget cuts at home, is pocket change in comparison to what Cameron could have achieved.” 

    Speaking on the BBC‘s Today Programme, Foreign Secretary William Hague said that Cameron had “secured beyond any doubt a full British opt-out from possible sanctions on individual member states and established that any possible future Treaty change would not affect the UK.”

    AFT reports Hungarian Prime Minister Viktor Orban has revealed that, at an official lunch ahead of the EU summit, French President Nicolas Sarkozy said that EU Justice Commissioner Viviane Reding had “insulted France as a nation” when she dismissed Franco-German demands for Treaty change as “irresponsible”.

    Related charts

    The Euro, FXE,

    The European shares, VGK

    The European Financials, EUFN

    Spain, EWP

    Ireland, EIRL

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