Inquiring minds are reading several recent articles on the EU Observer.

ECB Considers Alternatives to Bond-Buy Program

Please consider ECB mulling alternatives to bond-buy plan

The European Central Bank is exploring alternatives to its controversial bond-purchase programme but has yet to decide on any replacement policy tool, ECB Governing Council member Ewald Nowotny told a German website in comments published on Tuesday.

Nowotny, who is also Austria’s national central bank chief, said there was scepticism on the policymaking Council about the bond-buy programme “because we fear the market imperfections that we want to correct with this could emerge in another area.”

“We are discussing possible alternatives. But this discussion is not so far developed that we can dispense with the SMP (bond-buying programme),” Nowotny told the Wall Street Journal’s German website.

Bundesbank chief Axel Weber quit in protest at the programme last year and another heavyweight German ECB policymaker, Juergen Stark, also resigned over the plan.

The ECB more than tripled its bond purchases last week to the highest level since late November, spending 3.77 billion euros as a calm start to the New Year gave way to an intensification of the euro zone debt crisis.

The bond purchases face renewed scrutiny after Standard & Poor’s mass euro zone rating downgrades on Friday, though the ECB has resisted political pressure from within and beyond the euro zone to step up the programme on a major scale.

Alternatives? There are No Alternatives

The ECB has a choice. Buy bonds or don’t buy bonds. If the ECB continues to buy bonds, more and more of the risk will be put on the back of Germany.

However, if the ECB stops buying bonds, interest rates will soar.

This ponzi scheme will blow up sooner rather than later and that is precisely why the euro end-game is at hand. For details please see Time to Prepare for a Meeting of “Monetary Cardinals”

Finnish Foreign Minister Pours Cold Water on Merkozy Treaty

Please consider Finnish minister pours cold water on fiscal treaty

Criticising the EU for its “terrible hurry” to sign and adopt the new rules and for circumventing “all the normal parliamentary procedures,” Tuomioja wrote in his blog on Monday (16 January) that the treaty will overlap with existing EU laws on economic discipline – the so-called ‘six-pack.’

The new treaty will “just confuse decision-makers, undermine the EU commission’s role and create new divisions within the EU” he said.

“The whole contract is at best unnecessary and at worst harmful, and Finland has reason to oppose the whole treaty and at least remain outside it.”

One of the measures to be applied by the new treaty – a “structural deficit” of 0.5 percent of GDP – would be a “completely nonsensical straitjacket” that would only deepen recession and increase unemployment, he added.

In his opinion, the whole agreement is a concession made to Germany so that the EU’s paymaster lets the European Central Bank intervene more forcefully to stem sovereign debt problems from spreading to more euro-countries.

“We should not be taking orders from anybody,” Tuomioja said.

The article points out that Tuomioja is a “junior member in Finland’s ruling coalition and his views do not reflect the position of the whole government“. However, I point out that should the proposal be put to a voter referndum, it would fail.

Politicians, acing in their own best interests are likely to ratify the treaty.

4th Treaty Draft Underway, Numerous Questions Remain

Please consider Handful of questions remain on EU fiscal treaty

A fourth draft of the slim document – meant to copperfasten budgetary prudence in the EU – is to be circulated on Thursday (19 January), but most of the outstanding issues have been left for finance ministers to sort out in the hope the pact will be ready in time for an end-of-the-month EU summit.

One open question is determining the link between the permanent bail-out fund (the ESM) and the new intergovernmental pact. Germany – the main driver behind the treaty – is keen to have the intergovernmental agreement say only countries that have ratified it will be permitted to make use of the fund.

But according to an account on Monday evening (16 January) by Italian Socialist MEP Roberto Gualtieri – one of the European Parliament’s observers at the negotiating table – other countries fear this would once again create uncertainty in the markets.

Also open is how many euro countries need to ratify the treaty before it enters into force. The number has yo-yoed from the initial suggestion of nine, then to 15 and then back to 12. Germany wants a high number so that all struggling eurozone countries get on board.

On top of this, there is disagreement about wording in an article on economic policy co-ordination (Article 9). Opposing camps differ on whether to make mention of growth-enhancing measures and if so, on the nature of the reference.

Member states are also at odds on future eurozone summitry. An eternal question in EU politics, it concerns who has a right to be in the inner circle. Wording on the role of the European Parliament, the president of the European Commission and non-euro states still needs to be finalised.

“It’s a very important point which has been left open,” Gualtieri noted at an EU parliament hearing on Monday.

MEPs will be looking for the fourth draft to mention eurobonds in the introduction to the document – EU deputies are keen on the idea of mutualising eurozone debt, but it is fiercely opposed by Germany.

“There is a proposal by the commission – if it is accepted – of making reference in the recital of a path toward stability bonds. This would be at least an improvement in respect of a text that [is] only concentrated on fiscal stability without anything on growth and solidarity,” Gualtieri added.

Unresolvable Questions

Excuse me for pointing out the obvious but that is one hell of a lot of issues to be decided at the last minute. One has to laugh if not loudly mock the idea that Eurobonds under a new name of “stability bonds” are going anywhere given Germany’s stance.

As for the number of nations it takes to ratify the treaty, pray tell why isn’t the number 17, the exact number of nations in the Eurozone. Can someone point out a ratified agreement that “majority rule” dictates such matters? If not, then why does not every nation have to agree to such a change?

Would such a treaty change pass in a German referendum? I think not because it would open the door for majority rule eurobonds.

By the way, the above discussion explains why Merkel wants a high number as opposed to a simple majority. Even still, there is no guarantee every other country would not someday vote against Germany, just as 26 nations voted against the UK in a recent proposed change to the EU treaty.

Merkel is bright enough to understand this. However, like all politicians she does not really care about governance. She is more concerned about her legacy. She does not want the Eurozone to collapse under her watch.

Understand that and you can easily understand the horrendous compromises with French President Nicolas Sarkozy that she has made, as well as her pathetic agreement to a proposal that risk’s selling Germany down the river later via a majority rule construct.

Mike “Mish” Shedlock
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