As The World Turns; German Officials Raining on Bull Parade

Reports from across the Atlantic continue to buffet the market on the subject of whether or not the EU summit will be able to produce a meaningful change in the current sovereign debt crisis. And with the summit still a day away, this soap opera is likely to continue.

The latest report out of Germany Wednesday morning appears to be raining on the bull’s hope-filled parade. According to Reuters, a senior German official has said he can't foresee running EFSF and ESM simultaneously.

Recall that it was the report from the FT yesterday afternoon suggesting that negotiations were underway for the EFSF and its permanent successor, the ESM, to be run at the same time that was responsible for a rally in the markets.

In addition, Reuters’ unnamed senior German official said that he is more pessimistic than last week about the potential for on an overall summit deal amongst the 27 EU nations and that he expects that Eurozone states may have to meet separately at some point during this week’s summit.

"We get the impression from many conversations in recent days that a lot of the protagonists still have not understood how serious the situation is."

However, Reuters reports that the official says it is absolutely necessary to reach a new treaty foundation for Europe and that if the EU can't agree on a treaty change, then the Eurozone member states must do so.

In case you've missed an episode, the key to this week’s summit would appear to be the creation of a “fiscal compact” that would create an authority to oversee the budgets of member states and be able to punish budget cheaters. The assumption is that such a compact would satisfy the ECB and allow the central bank to become more involved in fighting the crisis.

The WSJ, FT and Reuters all published reports Wednesday discussing the such plans for deeper European fiscal integration and budget discipline without having to resort to full-blown treaty changes. The articles focus on a report to be presented to Eurozone leaders at their summit by EU President Herman Van Rompuy.

The FT reports that the EU President has drawn up plans that would allow the 17 Eurozone governments to agree to a "fiscal compact" without requiring national referendums among the separate government.

However, the WSJ adds that the big question is whether the more modest changes that can be delivered through amending existing components of the treaty will be sufficient to appease Germany and the ECB. The Journal notes that one shortcoming of this plan is that the European Commission would not be given the authority to discipline budget offenders.

With the ECB meeting and the EU Summit beginning on Thursday, you can rest assured that we have not heard the last proposal, objection, or counterproposal on the subject.

 

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