The Agreement to Do Nothing

All media sources were buzzing on Friday that "a historical agreement" between the EU27 had been achieved, that " Merkel and Hollande both had to compromise" and most importantly that "an agreement for bank supervision by the ECB has been reached". Well, I guess that's one part of the truth.

Francois Hollande and Angela Merkel. Source: Wikimedia Commons

In brief, what they have agreed is that the EU should have one authority supervising all the banks in the EA17 (all the nations which are using the euro as their currency), notably the European Central Bank, and that the start date of this should be the the 1st of January, 2014, instead of January 2013 as had been proposed by many EA nations. The issue for moving the date was that supposedly they would not have been able to have the legal framework of the regulatory authority ready until January 2013.

To be honest, I do not believe that. Regulatory frameworks can be completed in weeks if the need arises so what is the real cause behind all this? I guess it would have to be the fact that many nations both in the EU as well as in the EA have not yet accepted that they are part of one big family. The other reason would be that with Spain and Cyprus opting for bail-outs (the former is expected to do so in a few weeks and the latter is about to achieve an agreement with Troika in the course of this week), such a regulatory framework would mean that banks and not nations, would be accepting the financial assistance. This would make the nations less liable to reforms and austerity measures (although the deal is that in order for their banks to receive funding the countries themselves have to push through measures and reforms) which is not something austerity-bound Angela Merkel would enjoy. Thus, we are now witnessing the effect of a nation trying to rule the EU, with everyone else doing nothing about it.

In addition to Merkel's resistance on common bank supervisory system, Swedish Prime Minister Fredrik Reinfeldt and his Czech counterpart Petr Necas were also against "moving too quickly". Both the aforementioned nations are not part of the Eurozone for the time being. The big question here is why do nations outside the EA17 have an opinion and may block decisions that will affect only those within the EA17? Their answer usually is that they might have banks which are operating in the Eurozone so the decision is affecting them as well.

This is the same line of reasoning which would essentially mean that if these nations have the right to block legislation wherever their banks operate. I would like see them try to pull something of this kind off in the US, or Russia! Well I assume it wouldn't work. Germany on the other hand is trying to promote a solution of regulating just the largest of the banks. Yet, as usual, half-solutions are never the answer. Either the EU should go through with it all the way, or not at all. All other options are going to be a waste of money and people.

P.S. "Those who speak most passionately about political union are often the ones who hesitate the most when it comes to making pressing decisions,"said Francois Hollande. And he is probably right.

Hollande's Fallacy

Yesterday, as I was watching the news, the story of Francois Hollande's budget cuts of around €10 billion and his proposed 75% tax for the "well-off" citizens of France came up. Since I do not know any details on the cuts I will refrain from commenting, however, a 75% tax seems like too much.

Personal tax in France has so far had a maximum of 41% and now people who earn more than €1 million per year will have to give 75% of their income to the state. Although this is a temporary tax, expected to last until 2017 and then removed, I do not think that it is sustainable under economic logic. People who actually earn 1 million euros per year aren't those who sit around all day and do nothing. They are those whose responsibility is great, like operating pension funds or multinational organizations. They hold the wealth and jobs of many individuals in their hands and they have most likely worked exceedingly more than everyone else to get where they are now.

The problem here is incentives: Who would be motivated to work hard

A re-build of Greek credibility

Over the weekend we all heard the news of the Greek Prime Minister, Antonis Samaras, meeting with Merkel and Hollande. The overall outcome of their meetings was positive and Samaras is now determined to re-build Greece's lost credibility.

I do not know if someone in Berlin or Athens has read what I wrote on compromise and press releases, but from what I can read in today's press the Greek Prime Minister has ordered his Finance minister to accelerate the procedures for the new 11.5 billion euro austerity measures package. Another request was that a draft of the 2013 fiscal budget should be prepared before the next Eurogroup meeting in Nicosia, Cyprus, in September 14th.

All of the above are targeted to convince Troika, which will visit Greece again in the next few weeks, and the EU of their good intentions, in order to gain a two-year debt extension. Although as I have argued before, a two-year extension might be too much to ask, a one-year one might not be too bad, especially since the Greeks will have announced the new austerity measures by then. If the new budget is also significantly improved than last year's, I would see no reason for the EU officials not to congratulate Greece with a one-year extension period. (Some political leaders in Berlin have stated in a Der Spiegel article that they might discuss a one-year extension of the Greek austerity program)

It would seem that Samaras is doing more to assist his nation than any of Greece's former leaders. Trying to re-build a long lost credibility, promote structural changes and reforms, balance a troubled budget, and restore the Greeks' belief in both their government as well as the EU. The task has been, and will be, difficult, however, I trust that will little assistance from Brussels they will be able to cope with it just fine.