Markets reacted with timid optimism Friday

following the E.U. 'summit"

Europe Leaders - "Annus HorribiIis"
U.S. stocks rose - The Dow Jones ndustrial Average climbed 186.56, or 1.6%, to
12184.26. European stocks were also generally higher, and the euro rose slightly. But
the crucial government bond markets were mostly flat.
Europe's leaders crafted a new "fiscal compact" to repair flaws in their currency union,
but the deal lacked bold strokes investors have been urging and it could be insufficient
to halt the region's debt crisis.

The positive reactions appeared to be driven by relief that leaders had reached an
agreement at all, rather than enthusiasm for the deal itself. f recent history is any guide,
the glow could fade fast as investors focus on the details, or on a continued lack of
clarity over what role the European Central Bank will play.
"The summit was the first step toward fiscal integration, which is a problem we need to
solve, but it will be a long, drawn-out process," said Mohit Kumar, head of European
rates strategy at Deutsche Bank in London.
At its core, the pact is a series of relatively small steps. A long-envisaged permanent
bailout fund would arrive sooner than planned. The "quasi-automatic" sanctions
imposed on violators of budget rules would henceforth be "automatic." A requirement for
private creditors of bailed-out countries to suffer losses under certain circumstances
would be softened by moving it to the preamble of a legal document.
t's unclear how quickly the pact could actually go into effect. n the best case, Friday's
outcome presages months of continued wrangling.
Even as most European Union nations came together for the agreement, the summit
also sowed a sharp division: U.K. Prime Minister David Cameron vetoed an EU-wide
treaty to enforce the new fiscal rules, further isolating his country from the majority of
the bloc and renewing questions about the future of the relationship.
After a marathon session of negotiating that started Thursday and ran until early Friday
morning, the leaders emerged with two principal achievements: Euro-zone members
who run outsize government deficits will face automatic penalties, and all governments
will put balanced-budget procedures of some form in their national laws.
Both provisions have been floated before, and both are designed to address one of the
currency union's central flaws: The 17 euro-zone countries share a central bank and a
monetary policy but have little practical control over one another's spending decisions.
The final deal was, as most European agreements, a compromise between the
Continent's pair of big powers. Germany, the bloc's chief disciplinarian, scored many
points by just getting a fiscal pact at all. France, whose banks are big holders of weak
euro-zone government bonds, got Germany to relax somewhat its insistence that
private creditors of bailed-out countries face the potential of losses on their debt
holdings.
n the end, though, the compromise meant no far-reaching changes are in sight. As the
crisis accelerated through the summer and fall, a flurry of proposals emerged for big
changes to the bloc's core structuressuch as common euro bonds for raising debt, or
a "European finance minister" with sway over national budgets. The ideas quickly died
in the face of resistance from Germany and other countries.
EU leaders failed to get all of the bloc's 27 members to back a change in the EU treaty
to tighten their fiscal coordination but a pact of 23 nations pressed on with negotiations.
Jenny Paris and Geoffrey Smith discuss the fallout.
The ECB welcomed the deal but gave no hint that it was preparedas investors had
hopedto undertake massive purchases of euro-zone debt to prop up the region's bond
markets.
n the opinion of most outside economists, and a growing number of policy makers
inside the bloc, only the ECB with its unlimited ability to create Euros has the firepower
to build a backstop capable of ensuring heavily indebted taly has continued access to
financing. But the ECB has said it won't consider such big steps unless governments
put their fiscal houses in order.
"The only question that the market is currently asking is whether the political deal opens
the way for more forceful intervention by the ECB in the sovereign debt market," said
Jacques Cailloux, chief euro-zone economist of Royal Bank of Scotland in London.
EAL MAKERS: Pedro Passos Coelho, Portugal's prime minister, Germany's Angela
Merkel and France's Nicolas Sarkozy before Friday's summit.
t wasn't clear after Friday's session just what the ECB would do. ECB President Mario
Draghi, who attended the meeting, said simply that the agreements formed a "good
basis" for a fiscal compact.
What was clear was that the euro-zone governments are counting on the ECB to sail to
the rescue. They took only minor steps at the summit to beef up their own bailout funds
to fight the crisis, agreeing that their permanent C500 billion ($669 billion) bailout fund
would start operation in 2012, a year earlier than planned.
At Germany's insistence they also retained a C500 billion cap on the combined size of
the existing temporary fund and the new permanent fund, meaning that accelerating the
new fund will have little practical impact on the amount of cash available.
$everal other EU countries that don't use the euro
The euro-zone countries, along with several other EU countries that don't use the euro,
agreed to provide C200 billion to the nternational Monetary Fund, generally through
their central-bank reserves. Those funds would expand the resources that could be
used in the crisis.
Germany had initially pushed for full-scale revisions of the European Union's founding
treaties, a move that would deeply enshrine the fiscal pact in EU legislation and, just as
critically, give the EU institutions the authority to enforce it.
But treaty changes require unanimous consent of all 27 EU members, and several
including reland and the Czech Republicall signaled they'd have difficulty ratifying the
changes. The idea died entirely with the opposition of the U.K. Mr. Cameron sought a
laundry list of concessions on banking regulation in return for a treaty change.
There was little appetite to give him that, and EU leaders instead settled on an
"intergovernmental agreement" among a subset of countries. Such a deal can in theory
be ratified more quickly than treaty change, though it has less legal muscle.
Europe Leaders - Annus HorribiIis - Repeat Gatherings to TackIe Crisis
O eb. 4: As the rumors of contagion grow, EU leaders insist that plans made in
September should be made reality by June
O March 11: With combined MF-EU-ECB countries in place in reland and Greece,
euro-zone countries agree to coordinate economic policies more closely, urge
faster work on the two bailout mechanismsEFSF and permanent ESMand
reinforce markets' impression they are kicking the can down the road
O uIy 21: The official rift between all 27 EU states and the 17 euro members
appears, when the latter agree to steps to ease the Greek debt crisis, including a
bailout for some C109 billion
O ct. 27: Leaders agree to a second bailout for debt-stricken Greece, an
ambitious privatization plan, and increases to the common currency's bailout fund
O ec. 9: By agreeing to an intergovernmental treaty change at the level of 26
countries, a sea change occurs between the U.K. and its continental neighbors
"We will make the best of it," EU President Herman Van Rompuy said after the meeting,
adding that the pact would be "as binding as possible." Mr. Van Rompuy said at least 23
and as many as 26 countries would sign up to the pact.
The months ahead will be filled with serious challenges. EU lawyers will set to work next
week on wording for the proposed new accord, which leaders hope will be ready for
approval by March, after which it will be sent to national parliaments for ratification. n
the best case, that could take a further two to three months. t's not clear whether a
popular referendum will be needed in reland, which could seriously delay the timetable.
Finnish officials indicated they are opposed to a plan to permit the new bailout fund to
act by supermajority instead of unanimity.
One particular complication is the bid to make sanctions automatic. t recycles an idea
that the euro zone rejected in October 2010. At that time, the European Commission,
the bloc's executive arm, proposed that penalties for violating the fiscal rules be
automatically imposed; unless the countries voted affirmatively to block them, they'd
stand.The longstanding rules work the other way around. Penalties are imposed only if
countries vote for them. That led to the ignominious spectacle, in 2003, of France and
Germany each breaking the deficit ceiling and each voting against condemning the
other, killing enforcement efforts.
Source: WSJ an international press.
Date: December 11.2011

Mircea Halaciuga, Esq.

Financial news - Eastern Europe