Fri 12/9/11 4:03 PM – Can Europe Move Off Center Stage?

I think US stocks would move higher if Europe can be removed from center stage. The question is, “can it?” Can Europe take a bow and let the US economy have the spotlight for a while?

The agreement was reached today between all 17 Eurozone countries and all but one EU member country. Britain would not agree to it, partly because of a new transaction tax. The Brits may have really shot themselves in the foot.

From the view of the other members, Britain’s abstention means that instead of being an EU agreement that can use EU organizations to implement this, it is essentially an agreement between 26 individual governments, not the EU. That means EU treaty changes cannot be done and the work will have to be done apart from that framework.

The agreement is pretty much as leaked earlier this week. I don’t think the penalties and how to implement them specifically have been worked out. It will take a 3/4 super-majority to overturn the automatic penalties. Is this enough to enforce fiscal discipline? After all, only 3 of the 26 countries have deficits less than the stated goal of 3% of GDP and they are small countries. Even Germany is at 3%+.

My guess is that with recession overtaking much of Europe and threatening the rest, it will be difficult to get and stay below the 3% threshold. It remains to be seen if the penalties are harsh enough to really bring about fiscal discipline.

Here are the agreement details so far as listed at BBC News online

Cap of 0.5% of GDP on countries’ annual structural deficits
“Automatic consequences” for countries whose public deficit exceeds 3% of GDP
The tighter rules to be enshrined in countries’ constitutions
European Stability Mechanism (ESM) to be accelerated and brought into force in July 2012
Adequacy of 500bn-euro (£427bn; $666bn) limit for ESM to be reassessed
Eurozone and other EU countries to provide up to 200bn euros to the IMF to help debt-stricken eurozone members

On the plus side, it is a step toward greater unity and fiscal discipline. Yields must also fall on Italian and Spanish bonds for Europe to back out of the harsh lights shining on center stage. All seems fairly calm for now and if it was the European banks doing much of the selling of European sovereign debt maybe that will stay good for a while. If so, maybe we can get a rally into 2012.

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