Eurozone Fiscal Compact Still In Question on Many Fronts

Although there are no emergency summit meetings scheduled for this week (not yet anyway), Europe and the future of the Eurozone continue to be a focal point for the markets. Thus, we thought we’d provide an update on some of the things that are going on behind the scenes.

First, while France’s Nicolas Sarkozy is a major player in the attempt to re-shape the Eurozone, we must keep in mind that he faces an election in early 2012. And as is often the case in politics, Sarkozy's opponents are not necessarily on the same page with him.

The WJS reports that François Hollande, who is the front-running Socialist Party candidate, said Tuesday that he would seek to renegotiate the EU deal. Hollande highlighted his concerns about its outsized emphasis on austerity going forward. This leads us to believe that now may be the best time to try and get the fiscal compact deal done.

The Journal also is reporting today that the new EU deal is coming under scrutiny in Austria, where Chancellor Werner Faymann complained that it failed to strengthen the Eurozone's financial backstops.

Believe it or not, the deal isn’t exactly being welcomed with open arms in Germany. In an interview to be published in Der Spiegel, the president of Germany's federal parliament said Tuesday that he doubted the proposed measures would be considered legal in Germany's constitutional court.

Next up, Ireland says it may need to hold a referendum on the new EU fiscal pact, while reports indicate that Sweden, Hungary, the Czech Republic and possibly Denmark, may also require parliamentary approval of the deal.

Then there is the legal aspect of the compact. According to the WSJ, European Council President Van Rompuy said on Tuesday that the fiscal compact deal reached last week will not be easy to implement from a legal perspective. However, Van Rompuy appears to remain optimistic about the strong support for the changes, with 26 of the 27 EU members indicating interest in participating.

On the topic of what the ECB may or may not do going forward, Bloomberg reports that Benoit Coeure, France's candidate for a seat on the ECB's Executive Board, said Tuesday that the central bank may have to get aggressive going forward. Presumably this would mean that the ECB may be discussing the idea of buying more European bonds. According to the Bloomberg, Coeure said that any increase in the bond-buying program would continue to be aimed at ensuring the smooth transmission of monetary policy (in English, this means that Coeure is not suggesting "the bazooka"). He noted that “The ECB certainly has to keep its eyes peeled” for market developments and “should be ready to adapt.”

Finally, it is worth noting that there is lingering tension in the credit markets of the Eurozone. The bottom line appears to be that banks would rather park cash with the ECB than lend it – even on an overnight basis – to other banks, which is the normal practice. The WSJ reports that overnight deposits at the ECB hit another new 2011high of €346.36 billion overnight on Monday. The report indicates that deposits were up from the previous 2011 peak of €334.91 billion that was deposited overnight Friday.

 

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