Germany has given up a little, at the latest European Council, to France, on financial aid to countries with problems, but the road to EU unification does not change. The conclusions of the last meeting of the European Council are best explained in the report submitted by Council’s President Herman von Rompuy and titled “Towards a genuine economic and monetary union”. They are: “an integrated financial framework, an integrated budgetary framework, an integrated framework for economic policy, democratic legitimacy and strengthened accountability” (according to EU press release).
We were talking, not too long ago, about the “small steps policy” of the heads and founders of the European Union that want to bring the European countries to a full integration. A Parliament that is unique, a single tax code, one economic and foreign policy. A less visible and policy and undeclared officially, which leads the large majority of the activity from the “high level” of the EU. Germany seems to be losing ground after the last Council meeting, as the wave of force of French President, Francois Hollande, requiring a socialist direction for the EU, is too powerful to be stopped. At least for now. Although Angela Merkel has not accepted (yet) Eurobonds, concessions regarding helping Spain and Italy indicate a victory for President of France.
Cheap money from the ECB
Everything looks like a game, a dance of Eurogroup and EU leaders. On the one hand, they are harshly negotiating the financial aids, and, on the other hand, countries with problems are made to give up a little more of their sovereignty. “My position is that joint integration must take place first among the 17 euro area countries,” said Francois Hollande, adding that “Countries that have the vocation to join the single currency could also be involved.”
Note that the direction is clear, towards “unity”. Perhaps it is not a very bad thing, especially for countries where fiscal discipline is poor (meaning especially the level of bureaucracy, not just availability of citizens to pay taxes). But when it comes to the imposition of new rules regarding the potential of an economy, such as production quotas in agriculture, the “integration” is undesirable. Until a new summit where the new “direction” of unification will be discussed, we have euphoria from markets. Specifically, from the investors that have learned new installment of money is in the making, including debt coverage. Financial Stability Fund and the future European Stability Mechanism have provided €500 billion, which will cover only a small part of the debt of Spain and Italy, which totals €2,400 billion. On the other hand, European Central Bank reduced its lending rate to a new historic low of 0.75%, cheaper money for financial institutions.
Spain is a candidate for bailout
Market euphoria will not last long. Last medium-term bonds of Spain, amounting to €3 billion, were accepted at high yields, as the ten-year rate is at a historic high of 6.43%. The positive part of the last issue is that Spain can still borrow on foreign markets. However, Spain will need further steps to reduce public deficit to 5.8% in 2012 from 8.9% last year. Measures include raising VAT to 18% for certain products, such as food, taxed currently at only 4%. This means that Spain is the next candidate for a major bailout.
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