Trader Talk

Merkel's Friday Speech: What to Expect

What's next for Europe? Germany's Merkel speaks to the Bundestat (lower house of Parliament) Friday; it's an early indicator of what will happen at the EU Summit meeting December 9.

Merkel has said today (Wednesday) that she will call for "limited treaty changes" to allow for tighter fiscal oversight of euro zone countries.

She's said that she wants "limited contract changes only for euro members..." What does that mean?

It means she is trying to find a way around the cumbersome treaty ratification process... there has been some discussion recently about "enhanced cooperation" whereby a limited number of euro zone members might institute bilateral agreements on fiscal austerity. This would be quicker than full-scale treaty changes. See my Sunday TraderTalk blog post for more. 

But she doesn't have the option to wait even his long, and she knows it. It's the short-term proposals that will generate the most interest.

Most analysts believe that the back door is open for the IMF to come in. Where would they get the money from? There has been some discussion of increasing special drawing rights or additional bilateral loans from IMF members. Germany's Finance Minister, Wolfgang Schaeuble, said today this might be an option.

Another option: bring in the ECB as a lender to the IMF.

Under the Maastricht Treaty and its subsequent agreements, the  ECB cannot lend money directly to sovereign countries. It says so right in Article 123 of the EU treaty: "Overdraft facilities or any other type of credit facility with the European Central Bank...shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments... "

But they can lend money to international agencies like the IMF.

So the ECB could lend money to the IMF, then the IMF could use the money to fund Italy and Spain in return for "conditionality" — a fancy European word for tough austerity measures and IMF oversight.

Mind you, the additional money would come from the ECB, and would not necessarily require additional contributions from IMF members — including the U.S., which clearly does not want to front additional money.

Regardless: this may be enough to bring in more IMF funding from emerging economies, like China. Emerging countries prefer lending money to the IMF rather than directly — they simply have more control and more political influence.

IMF involvement also solves a major problem for Italy, where getting an austerity bill passed and implemented will be a daunting exercise. But if Italy's Mario Monti is forced to submit to IMF oversight, he can blame the whole mess on the IMF.

Elsewhere: notice U.S. economic stats have been doing better? While Europe is in the midst of a clear economic slowdown, "the U.S. economy is doing better than people think," Goldman Sachs' Jim O'Neill said on our air this morning. He's right: from the ADP Employment Report to November Chicago PMI to September Pending Home Sales, economic news this morning was better than expected.

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