Sunday, November 27, 2011

A smaller eurozone to ring-fence the stronger states from contagion

US equity futures rallied sharply on Sunday night on a story that Germany and France are exploring a smaller European union within or outside the eurozone with tighter fiscal integration.

One approach is based on a smaller group of EU states that would agree on stricter fiscal discipline, allowing others to join if they agreed to abide by the same principals.  The other approach is an agreement just between Germany and France with others joining later. 
Reuters (describing the two options): One is based on the Pruem Convention of 2005, also known as Schengen III, a treaty signed among 7 countries outside the EU treaty but which was open to any member state to join and was later acceded to by 5 more EU states plus Norway.
Another option would be to have a purely Franco-German mini-agreement along the lines of the Elysee treaty of 1963 that other euro zone countries could also sign up to, officials say. 
The goal here seems simple – to ring-fence the stronger nations within a tight union in order to contain the crisis.  Alternatively this could be a maneuver to threaten the weaker nations to comply with quick fiscal integration that may involve EU Treaty ratification.

Source: CNBC

As usual there are no details available and the rally is based entirely on hopes (plus strong Black Friday sales and a strange story out of Italy - more on that shortly). It is not at all clear how this process will deal with Italy and Spain, which remains a key question.
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