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Tuesday, August 16, 2011 10:14 PM

Merkel, Sarkozy Reject Euro Bonds and Expansion of Rescue Fund; What Does it Mean? Middle of the End for Merkel

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After all the debate and hype, with many clamoring for a European nanny state complete with common bonds, it has come down to this, at least for now: Merkel, Sarkozy Shun Euro Bonds

German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an expansion of the 440 billion-euro ($633 billion) rescue fund and rebuffed calls for joint euro borrowing to end the debt crisis, saying greater economic integration was needed first.

The leaders of Europe’s two biggest economies agreed to press for closer euro-area cooperation, tougher deficit rules and a harmonization of their corporate tax rates. A plan to resubmit a financial-transaction tax, which the European Union rejected in 2010, sent stocks lower in New York trading.
What Does it Mean?

For starters it means Angela Merkel no longer has capability to ram her ideas through the German Bundestag, the national parliament of Germany.

It also means that even if she could have, the measure would have failed.

The Dutch prime minister essentially rejected Eurobonds, and it is likely Finland would have as well.

More importantly, Germany's Finance Minister Wolfgang Schäuble emphatically stated "I rule out eurobonds for as long as member states conduct their own financial policies and we need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity."

Given that it takes a unanimous approval from all Eurozone nations to enact Eurobonds, Merkel and Sarkozy both realized political support was simply not present.

Middle of the End for Merkel

This is the "middle of the end" for Merkel. She has exhausted all of her political capital fighting a battle that is far bigger than she is. Merkel will not survive this mess.

Sadly, Merkel had it correct in the beginning, initially insisting on haircuts on bondholders. She gave in to the "no haircuts" fantasy under pressure from ECB president Jean-Claude-Trichet and French president Nicolas Sarkozy.

I said at the time it was a fatal Merkel mistake. Since then, Greece defaulted anyway and there are haircuts on bonds. More haircuts are coming.

Rescue Fund Insufficient

A "rescue fund of $633 billion is insufficient. All it takes to exhaust that fund are renewed problems in Italy or Spain, or increasing problems in France. All are likely. Expect more talks of EuroBonds in the not too distant future.

Mike "Mish" Shedlock
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