Wall Street Journal
December 6, 2011
The most critical week in the euro crisis has gotten off to a flying start. Markets rallied hard amid hopes Angela Merkel and Nicolas Sarkozy, now known to investors as Merkozy, had found enough common ground over euro-zone fiscal discipline to persuade the European Central Bank to unleash its unlimited firepower to support the bond markets.
A well-received Italian budget further boosted confidence, causing Italian bond yields to fall to 5.94% from a peak of 7.36%. But investors may be getting ahead of themselves: What currently the French and German leaders appear to be cooking up ahead of this week's summit appears well short of the comprehensive solution needed to answer several important long-term questions.
Perhaps the markets are simply relieved that the two leaders have come to any agreement at all, given how far apart they have been throughout the crisis on key political questions. Of the two, Mrs. Merkel has given the most ground. Both sides have agreed to toughen the euro zone's fiscal rules with automatic fines for transgressors. But Berlin had wanted the rules to be policed by a supra-national body such as the European Commission or the European Court of Justice. Instead, Mr. Sarkozy has prevailed: Responsibility for maintaining discipline will remain with member states, each of which will be required to incorporate debt brakes into their constitutions. The ECJ's role will be limited to ruling whether so-called Golden Rules comply with the European Treaty, while any sanctions will remain the responsibility of the European Council, voting by qualified majority.
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