EU Summit Calls for Budget Controls – Is It Enough?

After long and hard deliberations in the recent EU summit that was held in Brussels on Friday, December 9th there seems to be a basic agreement among 23 of the 27 European Union that call for stronger fiscal controls – but will it be enough to save the EU?

In the recent EU summit there was some progress as 23 countries including Germany and France out of the 27 EU countries agreed to strengthen the control on the fiscal decisions. The UK didn’t enter this agreement as the British Prime Minster Cameron  stated that this agreement doesn’t protect the British interests; three countries: Sweden, Hungary, and the Czech Republic didn’t sign this agreement and wanted to take some time to consider it.

The fiscal measures include limiting the budget deficit of each country not to exceed the 3% of GDP; holding the public debt at no more than 60% of nominal GDP; any failure to meet these limitations will be subject to sanctions.

In regards to the last limitation I don’t know how feasible considering that many EU countries’ public debt is currently over this 60% of nominal GDP. This includes (as of 2010) Germany with 83%, France 82% and Italy 119% – just to name a few.

Note that these limitations aren’t new and were composed in the original Growth and Stability Pact.

The EU countries also stated in the press release that each EU country will contribute €200 billion (roughly $270 billion) to the IMF so that it will have sufficient funds to deal with the current European debt crisis.

This EU Summit comes after the ECB rate decision in which the ECB cut the interest rate by 0.25 percent point; in the ECB press conference the president Draghi stated that he is against bond purchase plans as he believes that the ECB is about lending funds to banks and not governments. In light with this decision it’s not clear even if all the EU countries will make the contribution to the IMF will it be enough to stabilize the struggling countries.

Furthermore, controlling and monitoring the EU countries on keeping the budget under the set limit won’t be an easy task; if the EU countries won’t focus their budgets towards growth, it won’t help the counties to get out of their economic slowdown.

This news might have some negative effect on the commodities and forex markets coming Monday, as this treaty is just a first step towards dealing with the European debt crisis and isn’t much of step forward; in the months to come there will be additional EU summit that will try to secure additional steps needed to ward off this crisis including monetary funding.

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