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Monday, July 2, 2012

Euro compromises in Brussels likely to unravel fast (let's move on to plan Z!)

July 2, 2012  EUROPE  The major German concessions (above all, over the use of ESM European rescue funds directly for Spanish banking recapitalization) agreed at the euro summit are unlikely to enter into force. The compromises announced on Friday between creditors and debtors will fall apart because they are mutually contradictory. The good news (of sorts) is that the European Central Bank is out of the firing line for the moment. It can cut interest rates by ¼ percentage point on Thursday without being accused of kowtowing to government pressure. ECB bond purchases, hotly opposed by the Germans and a steadily growing band of other countries, are off the agenda as the focus switches to taxpayer-backed rescue devices. The bad news is that these taxpayers, and their parliamentary representatives, are about to revolt. Chancellor Angela Merkel arrived back in Berlin on Friday afternoon from her Brussels sojourn and ran into a firestorm of criticism. A fierce political and constitutional battle lies ahead. Whatever happens, the outcome will gravely weaken Europe’s most powerful leader. What happened over the past few days is a mockery of euro summitry and a travesty of parliamentary procedures in Germany. Merkel was forced into the Brussels agreement by a coalition of opposing interests who grouped together to blackmail her into submission. She was caught in a pincer movement.  The Social Democratic and Green Opposition parties in Berlin told her on Thursday they wouldn’t vote for the European fiscal pact and ESM in the Bundestag on Friday, the last day before the German summer parliamentary recess, unless Merkel agreed to a “growth pact” in Brussels. Aware of this, the Spanish and Italian government leaders, Mariano Rajoy and Mario Monti, sprung a trap, backed by French President François Hollande. Late on Thursday, Monti and Rajoy refused to agree to the “growth pact” unless Merkel made concessions on aid for banks and on conditions for direct bond purchases by the EFSF and ESM bailout funds. Hollande denied Merkel was bludgeoned into an agreement. But she was. All this will create further resentment in Germany. –Market Watch

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