David Cameron Loser In EU Deal, Sarkozy, Draghi Winners: Analysis

12/09/2011 02:04 pm ET

BRUSSELS (Reuters) - Napoleon dreamed of it, De Gaulle fought for it, but Nicolas Sarkozy may have achieved it -- a Europe of Nations with France in the cockpit and Britain on the sidelines.

The French president emerged as one of the big winners of a European Union summit on Friday which ended with up to 26 member states agreeing to move forward in economic integration around the euro zone, and Britain alone in staying out.

"Of course this is not just a long-standing desire, but a long-standing goal of French politics ... because in the French tradition Britain never really belonged to the European Union, dating back to De Gaulle," said a senior EU official who attended the summit, referring to the French president's veto of British entry in 1963 and again in 1967.

By obstructing the wish of the other EU members to amend the bloc's governing Lisbon treaty to allow closer fiscal union among the 17-nation single currency area, British Prime Minister David Cameron managed to unite Europe against him.

He may be feted by Eurosceptics at home, but he emerged as the biggest diplomatic loser of the summit, leading his country into an isolation that all his predecessors sought to avoid.

For centuries, a basic principle of British diplomacy was to maintain a balance of power on the European mainland forming shifting alliances with the main continental powers.

Cameron not only failed to win a blanket veto right over EU financial services legislation. The illusion of leading a group of 10 non-euro member states like Sweden and Poland, committed to a more liberal, open economy, crumbled as his supposed allies threw in their lot with the euro zone.

Even though Cameron said the Dutch had promised to look out for Britain's interests in the EU's single market, the City of London financial centre could be a loser in a two-speed, 26-1 Europe, given the current low political standing of banks and hedge funds.

For German Chancellor Angela Merkel, the summit was a more ambiguous success.

Europe's most powerful leader achieved her primary goal of anchoring strict German-style budget discipline, with automatic sanctions on deficit and debt offenders, in a new treaty, to be negotiated among the 26.

That should calm rebels in her centre-right coalition angry at successive bailouts of euro zone weaklings in which Berlin guarantees the biggest share.

But Merkel failed to keep the new "stability union" inside the EU treaty, due to Cameron's obduracy, making it harder to use key institutions such as the executive European Commission and the European Court of Justice to enforce fiscal rectitude.

Furthermore, she may have lost Britain as a useful ally in balancing out French tendencies towards trade protectionism and state domination of industry, which run counter to Berlin's economic interests.

Merkel acknowledged in a major speech in Bruges last year that Europe may have to use intergovernmental cooperation to advance economic integration because of the limits of the Lisbon treaty, and the lack of political appetite for revising it.

But Berlin wanted to remove political discretion from the fiscal sanctions procedure, while France was determined to allow politicians the last word on any decision to punish a country for budget delinquency.

Sarkozy has had to give ground to Merkel on many issues in the last few months, accepting intrusive powers to reject national budgets and backing off on calls for massive European Central Bank intervention to buy government bonds and the issuance of common euro zone bonds.

But the French leader, never keen on EU enlargement which diluted Paris' influence, never abandoned a vision of a smaller Europe with the euro zone as its core, run by a Franco-German directorate.

Cameron's empty-chair diplomacy gave Sarkozy the chance to turn that vision in to reality.

Another winner from the Brussels summit was European Central Bank President Mario Draghi. Barely a month in office, the Italian has already exercised decisive influence, shaping the emerging euro zone "fiscal compact" behind the scenes, while warding off efforts to hijack the bank to bail out governments.

Diplomats said the ECB was closely involved in telling euro zone leaders what economic reforms and budget discipline steps they should take.

Hours before Draghi came to the summit, the central bank had taken two decisive steps to shore up the euro area, cutting its interest rates to a record low 1.0 percent to soften a looming recession, and crucially extending long-term liquidity help to Europe's cash-starved banks.

But the ECB chief managed to avoid pressure from euro zone leaders to intervene massively to buy troubled states' bonds, which he fears would immediately weaken their resolve to carry out painful economic reforms.

After watching former Italian Prime Minister Silvio Berlusconi back away from austerity plans and economic reforms he had promised to implement as soon as the ECB started buying Italian bonds in August, Draghi is determined to avoid a repeat.

So while Sarkozy may have gone some way towards realizing Napoleon's dream, it is Draghi, for now, who looks more like the new emperor of Europe.

(Writing by Paul Taylor; editing by Janet McBride)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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12/09/2011 5:02 PM EST

Wall Street Finishes Week Higher After EU Deal

Wall Street closed higher this week, after European Union leaders announced that they'd reached a deal aimed at solving the Eurozone's debt crisis, according to Reuters:

The Dow Jones industrial average <.DJI> ended up 186.56 points, or 1.55 percent, at 12,184.26. The Standard & Poor's 500 Index <.SPX> was up 20.84 points, or 1.69 percent, at 1,255.19. The Nasdaq Composite Index <.IXIC> rose 50.47 points, or 1.94 percent, at 2,646.85.

For the week, the Dow rose 1.4 percent, the S&P gained 0.9 percent and the Nasdaq was up 0.8 percent.

Banks, which have been pressured by the uncertainty over Europe, rallied after the EU summit. Bank of America Corp rose 2.3 percent to $5.72, while JPMorgan Chase & Co added 3 percent to $33.18. The Financial Select Sector SPDR rose 2 percent.

Read the full story here:

12/09/2011 3:08 PM EST

Moody's Downgrades Three Major French Banks

The ratings agency Moody's has downgraded three major French banks because they have had difficulty raising capital.

Moody's slashed its rating of the long-term debt of BNP Paribas and Credit Agricole by one level to Aa3 and cut its rating of Societe Generale's long-term debt by one notch to A1.

"The probability that the banks will face further funding pressures has risen in line with the worsening European debt crisis," Moody's said.

--Bonnie Kavoussi

12/09/2011 2:26 PM EST

Britain's Balk From EU Treaty Raises Worry That It May Split From EU

British Prime Minister David Cameron's decision not to sign on to the deal reached by other European leaders raises worries that England may split from the EU, Bloomberg reports:

Dec. 9 (Bloomberg) -- David Cameron found himself left behind as the 26 other European Union leaders began negotiating the future of the region’s economy. Delivering on a veto threat his predecessors carried with them to Brussels for the past 30 years, Cameron strengthened the hand of members of his Conservative Party calling for Britain to pull out of the EU.

It was Conservative Prime Minister Edward Heath who took Britain into an embryonic EU, the European Economic Community, in 1973. His three Tory successors have each battled to maintain influence in Europe while refusing to sign up to the federal dreams of their neighbors.

Read the full story here:

12/09/2011 2:14 PM EST

In EU Rift, Cameron Loser, Sarkozy, Draghi Winners: Analysis

The deal European leaders reached Thursday indicates that in the EU rift, French President Nicolas Sarkozy and European Central Bank President Mario Draghi came out winners, while British Prime Minister David Cameron came out losers, Reuters writes:

BRUSSELS (Reuters) - Napoleon dreamed of it, De Gaulle fought for it, but Nicolas Sarkozy may have achieved it -- a Europe of Nations with France in the cockpit and Britain on the sidelines.

The French president emerged as one of the big winners of a European Union summit on Friday which ended with up to 26 member states agreeing to move forward in economic integration around the euro zone, and Britain alone in staying out.

"Of course this is not just a long-standing desire, but a long-standing goal of French politics ... because in the French tradition Britain never really belonged to the European Union, dating back to De Gaulle," said a senior EU official who attended the summit, referring to the French president's veto of British entry in 1963 and again in 1967.

Read the full story here.

12/09/2011 2:05 PM EST

IHS Global Insight: European Agreement Will Help Solidify 'Two-Speed Europe'

James Goundry, country analyst at IHS Global Insight, wrote in a report on Friday that unlike European government leaders, the European Central Bank ultimately holds "the key" to mitigating Europe's current liquidity crisis.

But he wrote that the importance of the agreement yesterday should not be discounted, since it "could well mark a significant moment in the creation of a so-called 'two-speed' Europe, which began with the creation of the single currency." Goundry added:

"The European Council statement makes clear that a new 'fiscal stability union' would seek to deepen the internal market and enhance competitiveness and social cohesion, in addition to creating stronger fiscal and economic rules. Outside this union, the UK is likely to become increasingly irrelevant and marginalised."

12/09/2011 1:49 PM EST

NYT Graphic Tracking Crisis By Country

The New York Times is featuring a graphic that's tracking developments by country.

Check it out here:

12/09/2011 1:40 PM EST

European Economist: Europe Has Accomplished Only One Of Three Necessary Goals

Charles Wyplosz, an international economics professor at the Graduate Institute in Geneva, wrote in a blog post for VoxEU that European leaders still need to accomplish two more large goals in order to address the sovereign debt crisis.

Wyplosz wrote:

With regard to the crisis, the beginning of the end requires three steps:

A backstopping of sovereign debts by the ECB;

A credible commitment to fiscal discipline over the next 50 years or so in order to reduce existing debts to comfortable levels;

Debt restructuring.

The summit has moved seriously on the second step, which makes the first step more plausible but, unfortunately, appears to have backtracked on the third.

12/09/2011 1:35 PM EST

The New Republic's Matt O'Brien On Why The ECB Needs To Save Europe And Why It Won't

Add The New Republic's Matt O'Brien to the chorus of commentary criticizing the European Central Bank for not doing more to stop the Euro crisis. O'Brien argues that the ECB is the only institution that can truly save the day:

It’s not yet certain whether European leaders will arrive at an agreement at today’s summit in Brussels, but what’s already clear is that Europe is running out of time. After two years of kicking the can down the road, contagion from the continent’s debt crisis has begun to infect Europe’s core. Indeed, the credit rating agency S&P recently threatened to downgrade the credit ratings of the entire Eurozone due to the increased risk of financial cataclysm. Increasingly, commentators are suggesting that only one European institution can possibly save the day: the European Central Bank.

Read the full piece on TNR's website.

12/09/2011 1:29 PM EST

Key Players In Europe's Financial Crisis

The AP put together a list of the key players in the European financial crisis such as Angela Merkel, Nicolas Sarkozy, David Cameron and others.

Check out the cheat sheet here.

12/09/2011 1:23 PM EST

Germany Is Considering Bailing Out Nation's Second Largest Bank: Der Spiegel

Germany has laid out plans for rescuing its second largest bank from default if necessary, according to the German newspaper Der Spiegel.

German government sources told Der Spiegel that if Commerzbank does not raise enough capital by next summer, Germany will buy a majority stake in the bank. The European Union has mandated that European banks need to raise their capital ratio to nine percent, which Commerzbank may not be able to manage.

"Commerzbank is the clinical thermometer for the euro crisis," one source told Der Spiegel.

--Bonnie Kavoussi

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