Changing the Rules
When Even Germany Fails
European Inverted Yield Curves
Time to Review the Bang! Moment
The Risk of Contagion in the US
Time to Start Watching China
New York, China, and Some Links

By John Mauldin

Angela Merkel is leading the call for a rule change, a rewiring of the basic treaty that
binds the EU. But is it both too much and too late? The market action suggests that time is
indeed running out, and so we’ll look at the likely consequences. Then I glance over the other
way and take notice of news out of China that may be of import. Plus a few links for your
weekend listening “pleasure.” There is lots to cover, so let’s get started.

Changing the Rules

I have been writing for a very long time about the changes needed to the EU treaty if
Europe is to survive. Specifically, last week I noted that Angela Merkel has made it clear that the
independence of the ECB must not be compromised. This week Sarkozy and the new prime
minister of Italy, Mario Monti, agreed to stop their public calls for such changes (at least until
their own crises get even worse, would be my guess). And Merkel has called for a new, stronger
union with strict control of budgets as the price for further German aid for those countries in
crisis. In seeming response:

“The European Commission on November 23 proposed a new package including budget
previews at EU level, the establishment of independent fiscal councils and growth forecasts,
closer surveillance of bailout recipients and a consultation paper on Eurobonds. There is also a
growing consensus among EU policy makers on the need for the adoption of fiscal rules in
national legislation. However, it is far from clear whether EU countries would accept the implicit
loss of sovereignty this would involve and agree to treaty changes enshrining legally enforceable
fiscal oversight at EU level. The German Chancellor, Angela Merkel, is willing to support a
change in Germany’s own constitution if the EU Treaty change to that effect is agreed first.”

But this means a major treaty change that must be approved by all member countries.
Note that Merkel wants the treaty change first, or at least the language, before she takes it to
German voters, which will certainly be required, since what she is suggesting is not allowed by
the present German constitution. Without the changes stated clearly and explicitly in advance, it
is unlikely, as I read the polls, that German voters will go along. Merkel has made it clear that
any proposed changes will be limited to fiscal issues and central control and not touch on the
ECB’s independence. She is adamant against eurozone bonds and putting the German balance
sheet at risk (see more below).

Full document embedded below:John Mauldin