Wonkbook: Three questions about the euro deal

at 09:43 AM ET, 12/09/2011

This post was updated at 9:43 a.m.

Ladies and gentleman, we've got a euro deal. Maybe. Sort of. We at least have a deal that Angela Merkel, chancellor of Germany, and Mario Draghi, head of the European Central Bank, say they're happy with. The deal includes 26 European countries, but not the United Kingdom, which wanted special carve-outs. The assembled leaders even said the new treaty could be signed by March. That's more agreement, and a speedier timetable, than many observers thought possible. You can read the deal here (pdf). But is it enough? Here are a few questions that need to be answered:


Slovenia's Prime Minister Barut Pahor (L), Germany's Chancellor Angela Merkel (C) and Finland's Prime Minister Jyrki Katainen attend a European Union summit in Brussels Dec. 9. (YVES HERMAN - REUTERS)
Does it solve Europe's crisis? The answer to this is clear: No. But then, it was never going to solve Europe's crisis. The question is whether this deal persuades German and the European Central Bank to act to solve the crisis. Everyone thinks that the real bargain here is that if Germany and the ECB get what they want out of the long-term deal, they'll do what's necessary to ensure the short-term survival of the currency union. And so far, Germany and the ECB seem pretty happy with the deal. So now we see whether they ever intended to save the euro zone. If they don't act soon, the idea that they ever will act loses credibility, and then Europe really falls apart.

Will it be enforced? Assuming the treaty is changed and Germany and the ECB put out the fire, does this actually change the treaty enough to matter? It's hard to say. At this point, there's not much in the way of enforcement mechanisms in the deal. So it's not clear what separates this suite of fiscal promises from previous packages of fiscal promises. Citigroup's Steve Englander voices the skepticism: "For those of us of a certain age, the fiscal language looks to be copied and pasted from the original Stability and Growth Pact with a few bells and whistles added to imply that ‘this time we mean it."

Will it work? The deal is pretty much about deficits, reflecting the German belief that the crisis is pretty much about deficits. But that's wrong. The debt burden in many of the weak European countries is a function of the financial crisis and the expectation of continuing slow growth. If growth picks up, then perhaps the euro zone could abide by these rules. If it doesn't, there's no way this kind of austerity is sustainable. And this deal says nothing about growth. Nor, to be fair, is there much that it could say. But in the long-term, it's growth that will decide whether the euro zone lives or dies.

As for the markets, they've reacted with something of a shrug. European indexes were down a bit yesterday and are up a bit today. As the Financial Times put it, "Trading is volatile as investors struggle to figure out whether they are pleased or disappointed with the outcome of the European summit in Brussels." So they're not yet disappointed, but nor are they particularly persuaded. Europe might be near a deal. But they have not yet found a solution.

Top Stories

1) Most of the E.U. signaled approval of a new fiscal union, report Peter Spiegel, Quentin Peel, Alex Barker and Stanley Pignal: "Ms Merkel sought to put a brave face on the outcome as she returned to the European Council on Friday morning, saying the new treaty to be negotiated by the 17 eurozone members, plus at least six others, would lay the foundations for a 'fiscal and stability union'. However, without agreement among all 27 countries, it remained unclear how the new fiscal rules the summit leaders promised to follow would be enforced. EU institutions – most importantly, the European Commission, which oversees and passes judgment on such rules in Brussels – legally cannot have a formal role in any agreement outside the EU treaties...Angela Merkel, the German chancellor who had hoped to secure a deal with all 27 EU members, said: 'We’re very pleased with the result. Yesterday was no weak compromise for the euro.' The leaders said the new treaty would be signed by March.

Here's the European Council's official press release (pdf): http://bit.ly/sUeKnF

2) Many in Europe are starting to fear the austerity measures a new Europe treaty could force, report Anthony Faiola and Michael Birnbaum: "For the host of European nations trying to hash out a deal here to save the euro, even success could prove economically painful. Leaders from the European Union’s 27 member states were deep in negotiations Thursday night, seeking to bridge differences on a pact that, among other things, sets such strict limits on government borrowing and spending that only a handful of European countries currently meet them. If the negotiations succeed, they could usher in a new age of austerity across Europe, unleashing a wave of even deeper government spending cuts and, in some cases, higher taxes. The magnitude of the challenge was underlined Thursday by revelations that the region’s ailing banks require fresh capital injections of $153 billion and by the spectacle of jittery markets falling in New York, London and Tokyo."

3) The ECB is cutting interest rates, report Neil Irwin and Howard Schneider: "The European Central Bank took new measures Thursday to bolster the continent’s ailing economy while dampening expectations that it would escalate its efforts to help struggling European governments borrow money at affordable rates. The ECB cut interest rates by a quarter percentage point and announced a program to make it easier and cheaper for cash-strapped banks to borrow money from the central bank. Both steps were widely anticipated. But ECB President Mario Draghi stoked the concerns of global investors by telling reporters that the central bank would not print money to buy government bonds. Many government officials in Europe and beyond have been urging the ECB to expand its purchases of bonds issued by Italy, Spain and other countries as a way of boosting market demand for the bonds, thereby bringing down interest rates that have approached prohibitive levels."

4) The Senate rejected two proposed payroll tax cuts, report Rosalind Helderman and Felicia Sonmez: "The Senate on Thursday rejected dueling partisan proposals to slash federal payroll taxes for 160 million Americans, while House Republicans trotted out a new, more conservative, plan that sought to link the tax issue to other GOP priorities. With an end-of-year deadline looming and lawmakers anxious to wrap up legislative business so they can leave Washington for the Christmas holiday, Congress is headed to a showdown over the payroll issue next week, when it must also approve an expansive spending measure to keep the government humming past Dec. 16. If Congress does not resolve the issue by the end of the month, the payroll tax rate paid by employees will revert next year to 6.2 percent, instead of the 4.2 percent that has been in place for the past year."

5) The Senate filibustered Richard Cordray's nomination to lead the Consumer Finance Protection Bureau, report David Nakamura and Ylan Mui: "An agitated President Obama accused congressional Republicans on Thursday of not standing up for ordinary Americans after the Senate derailed his nominee to head a new federal consumer protection agency. At a brief news conference, the president charged that his Republican adversaries were not acting 'on the level' after they blocked, by filibuster, his appointment of former Ohio attorney general Richard Cordray as director of the Consumer Financial Protection Bureau...Obama also said he would consider the controversial step of appointing Cordray when Congress adjourns next Friday for its holiday recess, during which it would not be empowered to block him."

Top op-eds

1) Mitt Romney made a fortune cutting jobs, writes Paul Krugman: "The current orthodoxy among Republicans is that we mustn’t even criticize the wealthy, let alone demand that they pay higher taxes, because they’re 'job creators.' Yet the fact is that quite a few of today’s wealthy got that way by destroying jobs rather than creating them. And Mr. Romney’s business history offers a very good illustration of that fact...Bain specialized in leveraged buyouts, buying control of companies with borrowed money, pledged against those companies’ earnings or assets. The idea was to increase the acquired companies’ profits, then resell them. But how were profits to be increased? The popular image...is that buyouts were followed by ruthless cost-cutting, largely at the expense of workers who either lost their jobs or found their wages and benefits cut. And while reality is more complex than this image...it contains more than a grain of truth."

2) Economic inequality isn't our main problem, writes Charles Krauthammer: "For Obama, these rich are the ones holding back the 99 percent. The 'breathtaking greed of a few' is crushing the middle class. If only the rich paid their 'fair share,' the middle class would have a chance. Otherwise, government won’t have enough funds to 'invest' in education and innovation, the golden path to the sunny uplands of economic growth and opportunity. Where to begin? A country spending twice as much per capita on education as it did in 1970 with zero effect on test scores is not underinvesting in education. It’s mis-investing. As for federally directed spending on innovation — like Solyndra? Ethanol? The preposterously subsidized, flammable Chevy Volt?...Yes, growing inequality is a problem throughout the Western world. But Obama’s pretense that it is the root cause of this sick economy is ridiculous."

3) The IMF needs to step up, writes Lawrence Summers: "The focus of the policy response to the crisis must shift from Brussels and Frankfurt to the IMF’s boardroom. From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of funds but also for those whose success is systemically important for the global economy."

4) Big government conservatism is good, but Gingrich takes it too far, writes David Brooks: "Gingrich loves government more than I do. He has no Hayekian modesty to restrain his faith in statist endeavor. For example, he has called for 'a massive new program to build a permanent lunar colony to exploit the Moon’s resources.' He has suggested that 'a mirror system in space could provide the light equivalent of many full moons so that there would be no need for nighttime lighting of the highways.' I’m for national greatness conservatism, but this is a little too great. Furthermore, he has an unconservative faith in his own innocence. The crossroads where government meets enterprise can be an exciting crossroads. It can also be a corrupt crossroads. It requires moral rectitude to separate public service from private gain. Gingrich was perfectly content to belly up to the Freddie Mac trough and then invent a Hamiltonian rational to justify his own greed."

5) The US should refuse to bailout Europe, writes Jim DeMint: "This year the U.S. sent about $67 billion to the IMF, which represents 17.7% of the IMF's yearly budget—nearly three times more than any other nation. On top of that, taxpayers provided an additional $108 billion credit line to the IMF in 2009. In 2010, the IMF sent nearly $40 billion in assistance to Greece, which did nothing to prevent the country's economic collapse in 2011. On Monday, the IMF approved another $2.95 billion worth of bailout funds for the struggling country. If this is what President Obama meant when he said the 'United States stands ready to do our part,' it's time for him to part ways from his European friends seeking the same kind of assistance that has been provided to Greece. American policy makers must send an unmistakable signal that the era of bailouts is over once and for all."

British belter interlude: Florence and the Machine plays "Shake It Out" live.

Got tips, additions, or comments? E-mail me.

Want Wonkbook delivered to your inbox or mobile device? Subscribe!

Still to come: The Senate filibustered Richard Cordray's nomination; the Kagan health care recusal battle is heating up; the Republican leadership is blocking an insider trading bill; some Democrats could support Republican efforts to tie Keystone and a payroll tax cut; and .

Economy

Jon Corzine testified before Congress, reports David Hilzenrath: "Jon S. Corzine, the former U.S. senator and governor who presided over the collapse of the commodities brokerage MF Global, told lawmakers Thursday that he never intended to authorize a transfer of customer funds to the firm’s accounts and that if he did 'it was a misunderstanding.' Under pointed questioning by members of the House Committee on Agriculture, the New Jersey Democrat would not rule out the possibility that someone at the firm misinterpreted him as suggesting that the struggling firm tap into investors’ funds. MF Global sought bankruptcy protection on Halloween after an effort to sell the troubled firm unraveled. The firm is now in liquidation. In his prepared testimony submitted before the hearing, Corzine said he could not explain what happened to 'many hundreds of millions of dollars' that the firm was holding for customers."

A corporate tax holiday doesn't look likely to happen, report John McKinnon and Kristina Peterson: "Proposals for a corporate-tax holiday face increasingly long odds in Congress, amid bipartisan opposition and a tight timeline for passing year-end legislation. Lawmakers who support the tax holiday—backed by major high-tech companies—were making a last-ditch effort this week to add the measure to a House bill that would extend an expiring payroll-tax holiday for workers. The lawmakers are banking on support among House GOP freshmen to attach the business-tax measure to the payroll-tax cut bill. But if their effort fails in the next few days, as appears likely, the corporate-tax measure would be shelved, at least for the time being. The corporate-tax holiday would give U.S. businesses a large, temporary tax break on as much as $1 trillion in overseas income."

Let's hope it isn't canceled interlude: "Christmas Infiltration", from last night's "Community".

Health Care

The Kagan recusal battle is heating up, reports Jennifer Haberkorn: "Attorney General Eric Holder told Congress on Thursday that he has constitutional separation of powers concerns about providing Republicans documents detailing Supreme Court Justice Elena Kagan’s role in defending the health law when she was in the administration. He said requests for information about any potential conflict would be 'best brought' by the parties to the upcoming Supreme Court case on the health law. Many opponents of the law want Kagan to recuse herself because of her prior position as solicitor general. House Judiciary Chairman Lamar Smith has asked the Justice Department to provide meeting schedules, documents and access to employees for interviews to determine if Kagan played a role in shaping the defense of the law before she was nominated to the Supreme Court."

Obama's Plan B decision is provoking a backlash, report Anne Kornblut and N.C. Aizenman: "President Obama on Thursday defended his administration’s decision to block unrestricted sales of the morning-after pill as a 'common-sense' parenting choice, even as women’s right advocates condemned it as a cynical move that could provoke a damaging political backlash for the president next year. The administration, according to several Democratic allies, took a calculated risk in making the decision to overrule the Food and Drug Administration, which had concluded that the contraceptive should be made available to people of all ages directly off drugstore and supermarket shelves without a prescription...Some of the president’s allies said that allowing the FDA ruling to stand could potentially have been more politically damaging for Obama if he was portrayed as giving teenage girls unfettered access to the morning-after pill."

Domestic Policy

Democrats are outraged at the Republican leadership's efforts to block an insider trading bill, reports Seung Min Kim: "Democrats aren’t taking House Majority Leader Eric Cantor’s takedown of Rep. Spencer Bachus lightly. Following a POLITICO report earlier Thursday that Cantor forced Bachus, the House Financial Services Committee chair, to reverse course on legislation that would crack down on congressional insider trading, the bill’s top backers lashed out at Cantor’s decision to pressure Bachus to back down...'Nobody in Washington … was probably more surprised than I that they decided to pull that markup,” added Rep. Louise Slaughter (D-N.Y.). “We’ve all got our suppositions for why he did it, but he’s not talked to me about it. Certainly I got no information that this was going to happen.'...Cantor’s office explained that many lawmakers – both Democrats and Republicans – believed they needed more time to look over the bill and not act abruptly to media pressure."

Case of the Mondays interlude: The world parallel parking job you've ever seen.

Energy

Some Democrats could back tying together the payroll tax cut and the Keystone project, reports Darren Goode: "The White House and congressional Democratic leaders are of one mind in opposing Republican efforts to combine the Keystone XL oil pipeline in a year-end payroll tax holiday and unemployment insurance bill. But the question is less clear-cut for dozens of Democrats that have backed quick approval of the project in the past. President Barack Obama twice in two days has threatened to 'reject' a plan extending payroll tax cuts and unemployment insurance if it includes Republican language to speed up a decision on the Keystone pipeline...But to some House Democrats, getting approval for the $7 billion, 1,700-mile pipeline from Alberta oil sands to Texas refineries is a serious effort that should hitch a ride in a must-pass payroll tax cut extension."

The House passed a bill blocking a fictional farm dust rule, report Peter Kasperowicz and Elise Viebeck: "The House on Thursday approved legislation Republicans said was aimed at ensuring the EPA cannot regulate so-called 'farm dust.' The Farm Dust Regulation Prevention Act, H.R. 1633, which would prevent the EPA from issuing any new rule over the next year that regulates coarse particulate matter, or 'nuisance dust,' passed in a 268-150 vote...The bill is a reaction to the possibility that the EPA might issue a new rule that affects farmers. Republicans have cited that possibility all year as an example of overreach by the EPA. A statement from EPA Administrator Lisa Jackson earlier this year that the agency now has no plans to issue any such rule did not deter Republicans from pushing ahead with the bill, which they said would create certainty that no rule would come out."

The US has denied blocking a global climate deal, report Pilita Clark and Andrew England: "The US rejected claims it was obstructing a new global agreement to curb greenhouse gas emissions and said it supported European Union calls for a roadmap towards a new climate deal. In comments EU ministers seized on to claim Washington was starting to back their demands in the final hours of talks, US envoy Todd Stern appeared to go as far as suggesting Washington now backed the EU 'road map' plan, the boldest offer on the table at the conference...But in a sign of the difficult path the US Democratic administration is treading as it tries to avoid providing Republicans with ammunition ahead of next year’s presidential election, while not being blamed for wrecking the talks, Mr Stern’s office later sought to clarify his remarks."

Fracking does, in fact, contaminate water, reports Ben Geman: "A preliminary Environmental Protection Agency report on apparent groundwater contamination in Wyoming from the gas drilling method called hydraulic fracturing could shake up the battle over federal regulation of the practice. EPA released a draft report Thursday with results of groundwater monitoring in a Wyoming natural gas field where drinking-well owners had complained of odor and poor taste. The monitoring showed chemical contamination that EPA said likely stems from hydraulic fracturing — a finding that, if borne out, would undercut industry claims that there’s no evidence that the method dubbed 'fracking' is polluting groundwater...Fracking involves high-pressure injections of water, chemicals and sand into rock formations, which open up cracks that enable trapped gas to flow. The method has created a natural gas boom in many states, but it carries with it concerns about pollution."

If governments were serious about climate change, oil companies wouldn't be worth what they are, writes Nicholas Stern: "Of this total, the proven reserves of the world’s top 100 listed coal companies and top 100 listed oil and gas companies could produce 745bn tonnes of carbon dioxide, more than half of the entire greenhouse gas budget for the next 40 years...It is hard to believe that these companies, with a combined value of $7.42tn, are banking on an imminent deployment of carbon capture and storage, which prevents carbon dioxide from being emitted from the burning of fossil fuels. So are they assuming countries will not meet their pledges for reducing emissions, and that we will carry on with 'business as usual'?...There is therefore a profound contradiction between declared public policy and the valuations of these listed companies, based on their fossil fuel reserves, which appear to assume that the world will not get anywhere near its targets for managing climate change."

Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.

 
Read what others are saying

    Most Read: Business

    DJIA
    0.07%
    S&P 500
    0.28%
    NASDAQ
    0.61%
     Last Update: 06:42 PM 11/27/2014

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from