Proposals for Eurobonds to share sovereign risk in U.E.

- stamped upon by the German Chancellor

Leaders of the euro zones three biggest economies have squashed market hopes for a huge intervention by the European Central Bank to solve the sovereign debt crisis and prevent a renewed recession. With euro zone bond yields soaring and UK borrowing costs below those of Germany for the first time since 2009, Angela Merkel, the German chancellor, again ruled out any expanded role for the ECB and stamped upon proposals for Eurobonds to share sovereign risk. The ECB, she said, was responsible for monetary policy alone. At a news conference with French president Nicolas Sarkozy and new Italian premier Mario Monti in Strasbourg, Merkel instead pointed to forthcoming plans for EU treaty changes to advance a distant fiscal union in the euro zone and, at most, early agreement to boost the bailout fund, the EFSF. The euro began to drop as soon as Sarkozy clearly kowtowed to Berlin only hours after his foreign minister, Alain Jupp, had called for urgent intervention by the ECB to "play an essential role in restoring confidence". The French president said proposals for changing the EU treaties would be made "in the forthcoming days" but insisted that the ECB's independence was untouchable and political leaders would make "neither positive nor negative" demands upon the central bank. Monti took a similar stance. Merkel said the trio would "do everything to defend the euro" and "we want a strong, stable euro" but repeated her mantra that this required strict actions by governments to abide by the rules of the stability and growth pact setting limits on budget deficits and national debt. The trio's comments, which poured cold water on any lingering market hopes of early and concerted intervention in the face of the deepening debt crisis, came as European banks run the increasing risk of being sucked into the vortex and of a renewed credit crunch. Only a day after Germany failed to find buyers for a third of a planned 6bn (5.15bn) auction of 10-year bunds, Belgian bonds soared to 5.7%, Portugal's credit rating was notched down to junk status and an ECB governing council member said the downturn would be "significantly longer than we expected" despite a 0.5% rise in German economic output in the third quarter. German media reports suggested that, privately, the country's political leaders are preparing to cave in on both ECB intervention and

Eurobonds when the crisis gets to intolerable or unsustainable levels. The only concrete decision to emerge from the mini-summit in the Alsatian capital was that the three are to meet again soon in Rome to discuss further Monti's pledge for structural reforms to promote growth and for a balanced Italian budget by 2013.Germany's constitution is highly respected, but it also obstructs the transfer of power from Berlin to Brussels -- a fact that has hindered the rescue of Europe's common currency. At the CDU's party conference this week, Angela Merkel may push for an overhaul of the Basic Law in order to hasten euro bailout efforts. Germany Virtually nothing is more sacred to Germans than their constitution, which is known as the Basic Law. It was originally planned as a stopgap measure, but it has seen the Federal Republic of Germany through the past 62 years. During the Cold War, political parties may have squabbled over conservative Chancellor Konrad Adenauer's political commitment to Western Europe and the United States -- and they had their differences over left-leaning Chancellor Willy Brandt's Ostpolitik policy of normalizing relations with communist Eastern Europe, particularly with East Germany -- but they immediately and unanimously praised the Basic Law. "We have one of the best constitutions in the world," German Chancellor Angela Merkel once said. Now, it looks as if Merkel herself may order an overhaul of the German constitution. At the party conference of the chancellor's conservative Christian Democratic Union (CDU) which commenced on Monday morning, Nov. 14, it is expected to approve a plan that could change the face of Europe -- and perhaps make it necessary for the Germans to rewrite their constitution. This operation to amend the constitution has already become one of the government's most delicate political initiatives. If it succeeds, it would remove one of the euro's biggest problems: The 17 euro-zone countries have a common currency but do not have a common finance policy, a fact which partly explains why the euro is teetering at the edge of an abyss. This is tackled in the key sentence of the new paper. "We need more Europe in key policy areas," it says. Merkel hesitated for a long time before making such a statement in public. It was three quarters of a year ago that German Finance Minister Wolfgang Schuble reportedly took the chancellor aside and explained to her that the euro crisis could not be resolved with spur-of-the-moment policies. He told the chancellor that he was in favor of using the crisis to advance Europe's political unity. At the time, Merkel rejected the idea. A reform of the European Union treaties would never meet the approval of French President Nicolas Sarkozy, she reportedly said -- but that was only half the story. Merkel was also afraid of the German Constitutional Court

in Karlsruhe: In its ruling on the Lisbon Treaty, the court made it clear that the German constitution allows for practically no further transfers of power to Brussels. Consequently, Germany's policy on Europe stagnated for months. The chancellor managed to put out the fires sparked by the currency crisis, but she still needed to convey a fundamental vision of the future of the monetary union. As the grumbling about her aimless policy on Europe grew louder, she changed course. After the CDU had shed its political skin so many times, she didn't want to reap criticism for allegedly abandoning the party's legacy on European policy. She convinced Sarkozy that there could only be one effective response to the tottering euro project: The monetary union had to be revamped. And she yielded to Schuble and gave the CDU party conference a new focus: European policy. The resolutions made at the party conference will not be empty words. Instead, Merkel and Schuble want them to serve as a foundation of a two-stage plan to reform the EU. As a first step, they want to amend EU treaties to allow notorious debtors in the euro zone to be placed under mandatory supervision by Brussels. How the Euro is pushing Europe Apart Since then, the monetary union has been on the brink of collapse. Far from growing together economically, Europe has in fact grown even further apart. As a result, the chances that the euro will survive in its current form are slimmer than ever. Politicians who ignore the laws of economics cannot go unpunished in the long run. If national currencies still existed, countries like Greece and Portugal could resort to a proven means of reducing their lack of competitiveness. They would simply have to devalue their drachma or their escudo, and then the laws of supply and demand would see to it that the flow of commodities was diverted. The prices of Greek and Portuguese products would go down to make them more marketable abroad. At the same time, money would be worth less in Athens or Lisbon, so that residents of those countries could afford to buy fewer imported goods. This would be beneficial for the trade balance. Exports would rise and so would the foreign currency revenues, allowing the countries to service their debts more effectively. Not the government but the markets would reduce economic imbalances. But in a monetary union, the exchange rate is no longer available as an adjustment valve. Instead, the member countries must regain their competitiveness in different ways, namely by imposing tough austerity measures and reducing wages and prices. In a monetary union, it is up to the governments to enforce what the exchange rate would do in a system of competing currencies. German banks and insurance companies have systematically reduced their holdings of Greek government bonds. Since the beginning of 2010, they have reduced their total exposure from 34.8 billion to 17.3 billion, not

including debt held by the state-owned development bank KfW. Insurance companies have reduced their investment in Greek bonds from 5.8 billion to only 2.8 billion in the last year. In Germany, it is state-owned banks who have the greatest exposure to Greek debt. Commerzbank, a quarter of which is owned by the federal government, holds 2.9 billion in Greek bonds. The state-owned regional banks known as Landesbanken and their so-called bad banks hold additional risks of more than 4 billion. The biggest dangers by far lurk on the books of FMS Wertmanagement, the bad bank for the nationalized mortgage lender Hypo Real Estate. It holds Greek government bonds and loans that constitute an economic risk of 10.8 billion. In the event of a debt restructuring, taxpayers would be hit hardest in Germany. A cut would mean that FMS alone would need several billion in fresh equity capital.
Data: November 12.2011
Source: International print press

Mircea Halaciuga, Esq. 0040724581078 Financial news - Eastern Europe