AT LEAST there is hope. Grim-faced European leaders gathered in Brussels on December 8th for their summit to save the euro with the news that Pope Benedict XVI was praying to the Virgin Mary for the sake of Italy and Europe. He should also spare a prayer for Mario Draghi, the president of the European Central Bank.
As the dinnertime negotiations stretched into the wee hours of Friday morning, leaked drafts of a communiqué indicate that the summiteers intend to agree to a “fiscal compact” to ensure the stability of the euro zone. These words matter: they are the same ones that Mr Draghi had used a few days earlier in a Delphic judgment that many interpreted to mean that he would intervene more heavily in the bond markets, once the politicians had delivered a more credible system to impose budget discipline.
The leaders seemed to be appealing directly to Mr Draghi to deploy the “big bazooka”, which only he controls, to protect big and vulnerable sovereigns like Italy and Spain. So is salvation at hand? Not quite.
Even before the summit had started, Mr Draghi punctured the bubble of optimism that his words had created. He had been misinterpreted, he said. Mr Draghi "was surprised by the implicit meaning that was given” to what he had said.
He also popped what had been another emerging reason for hope: that the ECB, or individual central banks, might lend money directly to the IMF so it could lend back to European states. “It's legally complex. The spirit of the treaty is that one cannot channel money in a way to circumvent the treaty provisions. If the IMF were to use this money exclusively to buy bonds in the euro area, we think it's not compatible with the treaty.” Markets quickly deflated.
Senior European officials suggest that Mr Draghi was just playing coy—perhaps because he is still new, or perhaps because he is Italian, or perhaps because he wants to hold the leaders’ feet to the fire.
To judge from the latest draft—parts of which are likely to be rewritten—the compact being negotiated broadly follows the lines agreed by President Nicolas Sarkozy of France and Angela Merkel, the German chancellor.
— Governments should adopt a fiscal rule to balance their budgets over an economic cycle, though they could incur deficits “in the event of exceptional circumstances”.
— Specifically, the structural deficit should not exceed 0.5% of nominal GDP. Countries with debt “significantly lower” than 60% of GDP could run higher deficits.
— Such a “golden rule” should be enshrined in national constitutions or other legislation. The European Court of Justice will have the power to verify whether the rule is properly transposed.
— Countries breaching the 3% deficit limit imposed under the existing Stability and Growth Pact will face “automatic consequences” unless ministers block action by a qualified or weighted majority (this is known to Brusselistas as “reverse QMV”). That said, “exceptional circumstances will be taken into account”.
Where the draft communiqué pulls away from the “Merkozy” script is in its attempt to open the door to Eurobonds:
…the possibility of moving towards common debt issuance in the longer term and in a staged and criteria-based process should be considered, once significant progress has been made in reinforcing fiscal rules and discipline. Any steps towards that end will have to be commensurate with a robust framework for budgetary discipline and economic competitiveness to avoid moral hazard and foster responsibility and compliance.
Another point that upsets the Germans is the idea that the European Stability Mechanism, the permanent euro-zone bailout fund that will replace the European Financial Stability Facility, should “have the possibility to directly recapitalise banking institutions and to have itself the necessary features of a credit institution”. In other words, it should become a bank, which would allow it to borrow from the ECB. This would be an indirect means of using the “big bazooka”.
These points are likely to be excised, or heavily rewritten, by the end of the summit. Moreover the paperwork leaked so far says nothing about the biggest underlying issue. Will the required changes to the euro zone's treaties be brought about with the agreement of all the EU's 27 members, or will the euro zone set off on a path of separation, by drawing up its own treaty? My column this week looks at the role that Britain, in particular, will play in determining the outcome. The word last night was that Mr Cameron was being "very tough". But when have his officials ever described their prime minister as a wimp?
In the short term the markets will not really care what legal instruments are used, or what diplomatic phrases are negotiated. The crucial thing will be whether the leaders have produced what Mr Draghi needs to act.
So leaders are performing a peculiar ritual to win the favour of the ECB president. If countries mortify themselves sufficiently, then perhaps Mr Draghi will smile upon them. Word has it that Mrs Merkel would not mind a greater role for the ECB, but it should not be funding governments too overtly, and it should not be told by their leaders what to do. This all to preserve the hallowed independence of the ECB.
France and Germany disagree bitterly about the ECB's involvement in the crisis. They have now agreed to keep silent; the less said about it, the better. If Mr Draghi were indeed to intervene, he should be seen to do so independently, not under duress.
And yet there is something incongruous about this idea that Mr Draghi should be kept pure and unsullied by worldly politics, concerned only with the celestial mysticism of monetary policy. If that were so, then why is he, like his predecessor Jean-Claude Trichet, attending a European summit where the grubbiest of political intercourse takes place? It is like having the pope come round to preach in a brothel.