Is Germany Going to Trigger a Lisbon Treaty Renegotiation?

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It’s hard to tell whether the story at the Guardian, based on a memo apparently leaked by Germany’s finance ministry, is overstating the situation in contending that changes Germany will demand for the euro regime could require a Lisbon treaty negotiation. From the article:

Following Greece’s debt emergency and with the euro in the throes of its worst crisis of confidence, Berlin also tabled a nine-point plan rewriting the euro regime to include legally enshrined budget deficit ceilings in all 16 member countries.

The German demands, in a finance ministry paper obtained by the Guardian, could require the EU’s Lisbon Treaty to be renegotiated, presenting David Cameron with a dilemma over whether this would trigger an EU referendum in Britain…

n what looked like a concession to her centre-left opposition before a crucial vote in Berlin today on the €750bn (£642bn) security blanket for the fragile currency, she [Merkel] said she would fight for a global financial transactions tax at the G20 meeting in Canada next month.

[Finance minister] Schäuble argued that if the G20 effort failed there should be a European tax and if that ran into resistance – not least with the British – he would recommend it for the 16 countries of the eurozone…

“The crisis in Greece has brutally exposed weaknesses in European monetary union,” says Schäuble’s paper. “Monetary union is ill-equipped to deal with the extreme scenario of sovereign liquidity and solvency crises.”…

Schäuble has dropped initial proposals that debt-ridden delinquents be kicked out of the single currency. But he argued that countries in dire straits must be allowed to restructure their debt or default “in a managed way”. It was not clear whether such a country would need to quit the euro. Also, national budgets should be peer-reviewed by specialists at the European Central Bank or “independent” experts to ensure budgetary rigour and adhesion to a revamped Stability and Growth Pact, the currency rulebook.

Some of these changes would need the EU treaty to be reopened, requiring the assent of all 27 members, whether in the euro or not.

I don’t see any related commentary in the blogs in my RSS reader, and while many news stories mention the Lisbon Treaty, SimialarlyI didn’t see any confirming this thesis (but there were a LOT of articles, so I easily could have missed one). Indeed, commentary seems to take the opposite tack. From Reuters:

There is also no appetite for treaty change to reinforce the budget rules, after the EU spent almost a decade securing agreement on the Lisbon treaty reforming its institutions.

From the Deccan Chronicle:

It is premature to sing dirges for the European Union (EU), but the path-breaking grouping that blazed a new trail after World War II and took a war-spattered Europe to a new trajectory of peace and prosperity is facing an existential crisis. What started as Greece’s financial meltdown impacting on the common euro currency has spawned an unprecedented soul-searching for answers.

It would appear that the EU has exhausted itself in tackling the Herculean task of completing the Lisbon Treaty process, itself a pale copy of the original new constitution rejected by French and Dutch voters in referendums.

Guest blogger Jacob Funk Kirkegaard at The Baseline Scenario similarly assumes renegotiation of the Lisbon Treaty is a non-starter:

But that prospect does not exactly lie around the corner. No revision of the Lisbon Treaty (which would be required for this scenario) institutionalizing regular budget transfers will be passed by the EU or the key euro-zone members any time soon…

Without a unified fiscal or political authority, the European house does remain “half-built.” But now the world gets to find out whether the European project is based on a fundamentally flawed design or whether it works when member countries actually stick to the rules.

Yves here. Unfortunately, I do not read German, so I can’t scan the relevant papers for confirmation. And it may be that the German demands could be handled in the current framework.

If not, this is a major development, even more of a blind-siding than the German announcements on sovereign CDS and stock shorting. The initial reaction is likely to be negative, since this would be a big wild card, and Mr. Market does not like uncertainty.

The reason for the lack of media notice may be that the German demands that would trigger a Lisbon Treaty renegotiation are deemed unlikely to go anywhere. Reader input would be very much appreciated.

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18 comments

  1. toxymoron

    We’ll need even more than a Lisbon treaty renegociation.
    The American government (or what passes for government) handed out free money to the banks and will ask taxpayers to pay back. But what European entity is going to hand out money, and ask French, German, Spanish, … taxpayers to reimburse? Can you see sovereign governments handing over such statutes? And to whom?

    So this will go nowhere. It’s only PR and talking heads (extend and pretend, as you so often say).

    Regards,

  2. attempter

    Berlin also tabled a nine-point plan rewriting the euro regime to include legally enshrined budget deficit ceilings in all 16 member countries.

    Will they make an exception for themselves this time like they did with the 3% ceiling?

    I love these myriad variations on “Da capo, but for real this time!”

  3. Martin

    I think this will go nowhere with a very high probability.

    What it shows is not so much, what will happen in the future, but that the bad mood of the population makes the gov’t to announce something. If this something makes sense, is realistic or whatever, doesn’t matter much to the political class (both gov’t and opposition) at the moment.

  4. Richard Kline

    While a renegotiation of Lisbon is in order in due course, stressing in due course, and good may come out of it, re-writing it to impose the will of Germany on the rest of the EU isn’t simply a non-starter it’s absurd and insulting. Common interests, not German tantrums, will underwrite changes to come. Simply writing in automatic debt ceilings is, in a word, stupid, in its inflexibility. Something more along the lines of an European Commission/Treasury with actual bite, money, and policy tools is more in order. Somehow, that doesn’t sound _quite_ like what German politicos with their hintern in a crack are talking about just now.

    And fiscal ceilings alone aren’t the real issue: fiscal _coordination_ is the point, and common standards for Eurozone member banks, their capital ratios, their regulators, and the means to intervene in their actions. To get fiscal discipline, the Germans are going to have to cede control over ‘their’ banks to a common authority. For starters.

    All this is just noise for the moment. When the dust settles real negotiations will begin. We’re still riding a crisis moment now, not the time for treaty negotiations. Much of Europe needs explicitly stimulatory fiscal policies furthermore, completely the opposite of what hard-headed caps would mandate.

    1. Hubert

      Very well thought through Richard.
      The german polit-establishment got caught totally and absolutely wrongfooted. Furthermore, they have no idea what to do now – all they announce & leak is meant to obfuscate these two facts. All you hear is just whistling into the (southern) winds of insolvency blowing northwards.

    2. Timmy

      Why is it so important for latvia to have exact same budget parameter as Germany?

      Seems absurd to me, IS the point of monetary union the well being of entire europe or abstract financial academic that obviously screwed just about everybody when the system enter unknown climate?

      It’s like having organism where heart, lung and toe nail all have to receive exact same of blood in the event of emergency. And wonder why such system produce a fainting idiot.

  5. charles

    From reading German media, there is no sign of this,
    except for the fact that the French president stated
    yesterday that the French constitution should be modified
    as for the incoming President to outline a 5 year outlook
    on his fiscal plan for the time of his mandate, which, amha, when you consider the destiny of, say, Spain’s public finances, over the past 5 years, seems absolutely vacuous.
    The book has been broken at the ECB, on the Stability and
    Growth Pact, and on the Lisbon treaty, maybe Barroso has enough free time to rewrite it…

  6. Swedish Lex

    Treaty changes are inevitable to avoid euro dissolution. 2-4 years, though. All 27 Member States would have to agree and will i.e. have the opportunity to bring forward their pet projects. The Brits will demand “repatriation” of some competences back to national leve, which the other Member States will have to accept (not sure they care, really, given the circumstances). Expect brutal negotiations since they, this time around, will be conducted with the (markets) clock ticking in parallel.

    The euro states will see if the existing Treaty rules on re-inforced EU integration between a “coalition of the willing” is preferable to a full 27 negotiation. The next EU budget will be debated in parallel which will render things even more interesting.

  7. Braden

    The Lisbon Treaty’s ratification was arduous. A German attempt to rewrite the treaty to punish wayward members is a non-starter, especially since wayward members outnumber solvent members. The negotiations over the Single European Act began as a response to currency crises in France and Italy, so it might seem logical that a new currency crisis will create conditions suitable to reform. Unfortunately, the new variable is public opinion in the Eurozone. If any reforms appear linked to austerity measures it will be political suicide to re-negotiate. The public is no longer deferential or uninformed about the EU.

    I think this memo, if leaked intentionally, is for domestic consumption. It might make some German Conservatives feel better about themselves.

  8. reeza

    Yves, Reeza here writing from Brussels.

    Speaking strictly from the Lisbon Treaty’s point of view, it won’t require a referendum because being self-amending, all that it needs is for a unanimous decision at the European Council (Heads of State) level. If there was a compromise prior to the German Bundesrat’s decision, Merkel probably knew this and that’s why had that as her fail-safe. Indeed, making the Stability Pact (or parts thereof) legally binding within the 16 Eurozone member states is probably going to have a much easier time getting through now for 2 reasons: its just the 16 and not 27 and the EU, in blunt terms, can’t live without Germany.

  9. danny

    I think the political establishment in europe will push for treaty change but only after the financial crisis escalates towards the end of the year after the sovereign bailout hype is over. The new treaty IMO will include the EMF (similar to a euro treasury), central monitoring and enforcement powers over nations, resolution fund?, some form of euro wide taxation powers, and the issue of new entrants to the eurozone should be dealt at a similar time.

    The next phase of the crisis should come as a result of geopolitical crisis’ and its effects on confidence. The issue of new EU members will be also addressed in the near future too. The euro should be resilient in the face of the next crisis compared to other european currencies therefore prompting others like poland to want in (funny how the polish CB head who was anti euro died recently in a plane crash).

    The global elite should also pursue a similar method in order to phase in world government.

  10. Stan

    Bail-out not equal free donation. Greece has to repay this money back at higher interest rates than which they borrowed it, a lot of people forget that.

  11. /L

    The best that can happen is that EU breaks, an elite project that long ago lost contact with reality. They integrated a lot on national symbols, pseudo parliament, a flag and the money and corporate Europe. I don’t know if they forgot about the people of Europe or thy just didn’t want them to come along and integrate in the illustrious project.

    Without a unified fiscal or political authority, the European house does remain “half-built.”

    These days we hear this over and over again, it accounts for no more than froth. What is the use of unified fiscal or political authority in these times of crisis, they simply don’t want to stimulate the economy. The only thing they want to use this power they long after is to stop any sort of deficit, and we have been much worse than it is. Albeit maybe not so much attack from the wolf pack but unemployment and so on probably had been much worse. God help us so these loony’s don’t also get even more fiscal or political authority over us, they for sure don’t have benevolent plans for us the people.

    Jean-Claude Trichet interview that the German magazine Der Spiegel
    some cuts from Billy blog

    Jean-Claude Trichet:
    Just who has been weak over the past few months? It was not the ECB. The governments with their high debts were weak …

    ECB and Trichet is accountable to no one, there is no democratic checks and balances on him, whatever he do he is untouchable. He have only one task, price stability. He don’t have to face the people, the unemployed, those can’t pay their mortgages and rent and so on. According to Mr Trichet those politicians who believe they are in office to serve those people is weak.

    Jean-Claude Trichet:
    Those who believe — or, even worse, are suggesting — that we will tolerate inflation in the future are making a grave error. The governing council of the ECB did not hesitate to increase rates in July 2008 in a period of financial turbulence in order to ensure price stability. We were criticized at the time by the markets. This is a measure of our inflexible determination.

    Why doesn’t he join some Islamic fundamentalists or some other extremists he would for sure feel at home in any sort. “a measure of our inflexible determination

    Trichet also said the ECB now demands “extensive adjustment programs from the governments

    There is a need for a quantum leap in the governance of the euro area. There need to be major improvements to prevent bad behavior, to ensure effective implementation of the recommendations made by “peers” and to ensure real and effective sanctions in case of breaches (of the Stability and Growth Pact). The ECB is calling for major changes …

    Who does he think he is, the sovereign of Europe demanding this and demanding that. Who have elected this joker?

    These jokers that didn’t see it coming and when it came the didn’t understand and still don’t get it, now they want to have supremacy over all the democratically elected bodies in Europe and like Roman emperors make thump up or down on what democratic bodies have decided.

    This is beyond bizarre it have turned in to a freak show.

    The German Chancellor during the late Weimar republic, Heinrich Brüning, was the most obsessed by fiscal orthodoxy of all statesmen at the time. His fear of budget deficits made him pursue a policy of merciless austerity, which forced the German unemployment rate up to 40 percent. The increasingly desperate population came to view Hitler as ”unsere letzte Hoffnung” – our last hope. A racy detail in this historical misery, is the Keynes met Brüning in Berlin 1932. The Chancellor had to face harsh criticism, but Brüning boldly declared that it would be folly to give up ”a hundred yards from the finishing post”. But Brüning never reached the finishing post. Instead, he unrolled the red carpet for Hitler.

    The real obstacles to expansion are neither economic nor financial, but political. If the political desire to carry out an expansion is lacking, then surely nothing is going to happen. … Today, they are marching like a lemming migration towards an economic, social and political precipice. … To stand up against the tide and appeal to common sense would most probably only lead to one being trampled down. The lemmings have made up their minds. They don’t know why, but they know where they are going. And they do what is necessary to get there.
    Per Gunnar Berglund

  12. PJM

    Do you remember the epic sentence?

    “You cant handle the truth.”

    Let me remember Jessep militar today and give another link:

    http://rt.com/Business/2010-05-19/us-attack-euro-engdahl.html?fullstory

    And we hear:

    “The whole attack on Greece and the attack on the euro originated from a concerted strategy of Wall Street and US Institutions to permanently cripple or try to cripple the only alternative reserve currency anywhere in the world that can challenge the dollar”

    Now we are seeing more voices handling the truth. Can you handle the truth also?

  13. Scott

    Yves, this whole thing reminds me of 1931. The cyclical peak was 1928. By 1931 the stresses became acute. And the advice was: stay on the gold standard! The medicine was austerity. Because the gold standard is a dogma, it shielded people from the obvious: some countries needed to devalue. Like gold, the euro is a super-sovereign currency (not under any one country’s control). Like the gold standard, EMU is becoming dogmatic. People have got to come round to seeing Greek (et al) exit as okay. It might even be an intermediate step to a more sensible union in future. Anyway, here are the five core steps Europe needs to take:

    1. Convert the eur 750 bn rescue fund to a re-capitalisation fund for the banking system.
    2. Restructure Greek sovereign debt, with a write-down of 70%.
    3. With an EU imprimatur, forcibly redenominate Greek contracts in drachma, including cross-border contracts.
    4. Greek central bank exchanges euro for drachma at the rate of 1 for 1. (There is no need to make it 1 to 5 or whatever. The point is that the drachma will depreciate against the euro and other currencies in the fx market, whilst still being used like a euro at home.)
    5. Gain the agreement of Greek unions not to index wage demands to expectations of inflation for some fixed time period (four years).

    These steps are not very pleasant but they are not unprecedented; the alternative is far worse. Labour agreements like this are a staple of “exchange-rate based stabilisation” policy and have been done dozens of times. On the forcible re-denomination: FDR devalued the gold value of the dollar in 1933 and forcibly abrogated the gold clause in all US debt contracts (which abrogation was upheld by the Supreme Court). I can understand how odious this sounds, but in fact it was crucial and US recovery got underway once FDR devalued the dollar. Look at just about any time-series graph of activity in the 1930s. It’s unmistakable.

    We mustn’t let 2010 follow in the footsteps of 1931.

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