What was Said was Only Half the News
What Was SaidA need for further financial and economic integration was identified by France and Germany. Merkel and Sarkozy outlined a vision of closer multilateral coordination whereby bi-annual meetings of the 17 heads of the eurozone governments would take place, chaired by the president of the European Council. The main objective would be to gradually further Eurozone fiscal and economic integration.
Three important revenue ideas were put forward by France and Germany. These were the establishment of a financial transactions tax or "Tobin Tax" in order to dampen volatility on the financial markets while simultaneously providing a large and stable source of revenue, and the harmonization of corporate tax rates to prevent a race to the bottom among Eurozone countries - an issue which has cost many jobs in both Germany and France in the last decade. Also, a requirement for balanced government budgets to be enshrined in constitutional law was proposed. While this last requirement would restrain countries from engaging in crisis-response, it may b somewhate prudent in other parts of the business cycle. Any fiscal rules should in my view respect the reality of crisis response as well as counter-cyclical fiscal needs.
This development is generally quite positive in the sense that the crisis demonstrated a clear-cut need for closer coordination between the Eurozone countries. While the the architecture for financial-regulatory convergence has been laid out by the European Union in setting up the European System of Financial Supervisors (ESFS) and the European Systemic Risk Board (ESRB), the issue of fiscal coordination has been overlooked by the European Union for the moment (other than the purely theoretical idea of actually enforcing the Maastricht Treaty).
What Wasn't Said
What was conspicuously missing from the headlines was the impetus to organize economic governance at the European level. rather, the multinational level was emphasized. Seen from the point of view of the markets, this means that Europe has opted for a coordinaiton system which is both informal in nature - whereby any agreements reached might not have the binding force of law, and may only be addressed twice a year, which may frankly be insufficient - and slow to react to changing circumstances on the ground.
In short, there will be no oraganized institutionalized attempt by the European Union to address the fiscal issue. The idea of "Eurobonds" -the most stable anti-crisis fianancial instrument possible- was downplayed. it seems that regional economic stability has taken a backseat to German naitonal interest.
Needless to say, the markets didnt like the result of this. The market detects a missed opportunity to optimally address the fiscal disparity issue within the Eurozone.
What was the Result?
Both the French CAC and the German Dax took a more than 5% plunge in the aftermath of this announcement. The reason: markets saw this as missed opportunity. The Eurozone's leadership could have declared a committment to address both the Eurozone crisis and the financial market volatility in an organized, transperent, and instituional fashion. Alas, they didn't. This of course was enough to prompt finiky investors to sell.