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This is the start of a liability union and a proto EU Treasury, Armageddon is postponed again

Ambrose Evans-Pritchard 25 July 2011

Italy and Spain can breathe easier. Europe can hope to muddle through the summer. Armageddon is postponed again.

Yielding with a gun held to your head is hardly a fair test of civic enthusiasm for EU integration.
Eurosceptics can claim a less tainted vindication.
They warned from the outset that EMU was unworkable as constructed and would lead ineluctably to the traumatic choice of break-up or fiscal union, with all the implications for democracy that such union implies. They have been absolutely right.

Clause 7 of the Brussels accord states that Europe's bail-out fund (EFSF) will have powers to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments" in any EMU country, opening the way for a `Euro-TARP' to rescue banks. The German bloc can henceforth blanket the entire South with its AAA rating, if it dares.

Dr Merkel denies that Germany has crossed the line towards shared fiscal destiny. Berlin retains a veto on use of the EFSF. "As I understand it, a transfer union would be automotic subsidies," she said.

To the extent that Germany does have a meaningful veto, then the deal agreed on Thursday will inevitably be tested by markets. Investors will want to know whether she can secure Bundestag approval for the colossal sums needed to make the EFSF credible. Mrs Merkel cannot hve it both ways.

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