On December 8 Merkel and Sarkozy will have reached a 6-point agreement requiring ratification of a new treaty.

However, details will not be finalized until March. At that time, if all goes to plan (and it won’t), a vote by all 27 EU nations will take place. If that fails (and hopefully the UK torpedoes it), various aspects of the treaty might still be ratified by (and apply only to) the 17-member Eurozone nations.

However, fiscal rules will still require individual referendums in Ireland and in my opinion Germany. Got that?

Eurointelligence writes That „comprehensive agreement“ in full

Angela Merkel and Nicolas Sarkozy essentially agreed on the German position. These should be embedded in a New Treaty, and they have asked Herman van Rompuy to put those proposals formally on the agenda for the Dec 8 and 9. Here is a summary of the six most important decisions taken. As so often, the newspapers cover only a short subset.

  1. Automatic sanctions. In case of non-compliance with the deficit rule, countries are subject to automatic sanctions, which will require a majority of 85% to overturn.
  2. Golden Rule: All EU member states, but in particular the eurozone, should subject themselves to uniform debt limits. The ECJ will adjudicate in case of a dispute, and should have the right to declare national budgets illegal.
  3. Private Sector Participation will follow the rules of the IMF. The PSI agreement on Greece remains valid, but is a unique case that should not be repeated;
  4. Germany and France want the ESM to start end-2012.
  5. The heads of state and government meet once a month as the eurozone’s economic government.
  6. There shall be no eurobonds.

These proposals indeed require substantial treaty change, but we are surprised that this could be concluded so quickly, given the necessary procedures, and their own implantation record. A change in the EU treaties would require a convention, unless the European Parliament were to decide to wave its rights in this respect.

Given that these proposals entail a transfer of sovereignty, national referendums in Ireland and possibly other countries may be required. While there are possibilities for the eurozone to adopt its own set of policies, points 1 and 2 (which are the main element of the fiscal agreement) require a full treaty change, to be ratified by all 27 members (even if the provisions are only implemented in respect of the eurozone).

We suspect therefore that Sarkozy agreed to these measure in the full knowledge that this will never be implemented. If you subtract the treaty change proposals, one is left with a shallow agenda.

Also, newspapers reported that Merkel gave up PSI. That is not true. The position is now that the IMF rules will be applied, which are not all that different. CACs will also remain in the ESM treaty.

Shallow Agenda or No Agenda at All?

Ambrose Evans-Pritchard weighs in with Zilch again from Merkozy

No fiscal union, no Eurobonds, no ECB as lender of last resort – yet. Just the usual blather and a revamped Stability Pact (Fiskalunion).


Merkel seems to have backed off on demands that budget breaches will be justiciable before the European Court, so the Treaty chatter is mostly Quatsch, bêtises, and eyewash.

This Merkel climb-down makes it less likely that she will give in on real rescue measures, so why the market exuberance in Italy? Beats me.

Private investors will not have to face further haircuts after Greece (if you believe anything they say on this subject) but that was already the case. Nothing further to add at this stage.

Will 27 Nations Sign on the Dotted Line?

Those treaty changes may sound good on paper, but what is the likelihood these treaty changes pass? The Washington Post chimes in with Sarkozy, Merkel call for new E.U. treaty to address debt crisis

Under growing pressure from nervous financial markets, the leaders of France and Germany reached a difficult compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments.

If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world.

Although France and Germany represent the core of the European Union, it is far from certain that the rest of the group’s 27 nations will go along at a crucial European summit scheduled for Thursday in Brussels. The deal could face significant opposition from those reluctant to surrender national sovereignty over fiscal policy.

“This package of measures is a proof of our absolute determination to guarantee a stable euro,” Merkel said at a joint news conference with Sarkozy in Paris.

The Franco-German accord is to be outlined in a letter to E.U. leaders Wednesday and voted on at the special summit conference the next day, making this a make-or-break week for the ideal of European unity. Sarkozy said the hope is that all 27 E.U. nations will adhere to the plan. But he said it could also move forward with consensus from only the 17 countries that have adopted the euro as their common currency.

The swift schedule for the treaty change is unheard of in the history of the European Union, which is notorious for slow-moving bureaucracy and endless bickering among governments at all-night conferences at the union’s Brussels headquarters.

The deficit limits — a “golden rule” of 3 percent of gross domestic product — would be enforced by elected leaders of the European Community acting with a supermajority of 85 percent, according to explanations provided by Sarkozy and Merkel at the news conference. The E.U. leaders would rule on any government cited as overspending by the European Court of Justice, they added.

In a suggestion of the debate still to come, British Prime Minister David Cameron said he did not intend to “pass any powers from Britain to Brussels.” He noted that if the treaty changes suggested by Sarkozy and Merkel require such a transfer, he would have to call a national referendum to approve them.

Would the UK voters agree to this in a referendum? Ireland? Germany? Austria? Netherlands?

I think the answer is no. So what is left in this much ballyhooed great compromise between Merkel and Sarkozy?

Here is the compromise in case you missed it.

  • Merkel gets the “no eurobond” position she wants
  • Sarkozy gets the “no bondholder haircuts except Greece” position he wants.

This proposal solves absolutely nothing. For some reason the market seems to love “nothing” these days. Don’t expect that to last.

Mike “Mish” Shedlock
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