Who would have thought that the stresses and tensions between the Cons and the Libs would have been exposed so mercilessly so quickly?   Angela Merkel, having to expend on behalf of Germany 20% (Euro 150bn) of the colossal Euro 750bn ($1 trillion) Greek bail-out, understandably is now demanding that there should be quite fundamental changes in the Lisbon Treaty to ensure that fiscal irresponsibility by one State cannot in future drag down the whole of the Eurozone.

Germany has already tabled a 9-point plan rewriting the Euro regime so as to embed legally sanctioned budget deficit ceilings in all the 16 member Eurozone States.   At the heart of this is a new enforceable Stability and Growth Pact which is designed to achieve budgetary rigour to prevent any State exceeding certain deficit ceilings.   This has of course been tried before  to ensure that the more easy-going budgetary practices of the South of Europe were kept more in line with the stricter rules of the North – only to fall apart when both Germany and France exceeded the limits, but then because of their political muscle went unpunished.   It’s a fair question whether this newer version will fare any better.   But there’s a sting in the tail.

Germany has already gone out on a limb in unilaterally pushing the prohibition of naked shorting (i.e. to prevent profiteering from falling markets by short-selling credit default swaps on sovereign debt, where the trader doesn’t own the instrument he’s selling).   This is likely to fail to curb speculators since German jurisdiction is confined to Germany and has not prevented most trading activity in CDSs taking place in the City of London and on Wall Street.   Nevertheless it does demonstrate German determination, even desperation, to take all measures necessary to toughen banking regulation across the EU.

That probably requires not only a levy on banks to repay taxpayers, the separation of retail from investment banking, greater powers for regulators to intervene earlier and more effectively, closer fiscal harmonisation to prevent unmanageable debt bubbles developing in the first place, and what Merkel has dubbed ‘orderly bank insolvencies’ so that no banks are ‘too big to fail’ and can be let go without massive taxpayer bail-outs or overriding damage to the economy.   The key point here is that some of these reforms would require the EU Lisbon Treaty to be reopened, and that would need the assent of all 27 Member States, both those in the Eurozone and those outside (like the UK).

That then opens up the fascinating question whether the anti-EU fanatic William Hague will seize his chance to secure at last the UK referendum on the EU which he has been plotting for so long, and if so, what will be the reaction of the fanatically pro-EU Libs like Clegg.   It does also, not least, raise the interesting prospect of what the result of such a referendum might be when the latest poll on this revealed 58% of the UK population opposed.

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