Suddenly, Europe's Gameplan To Save Itself Is Becoming Very Clear

Joe Weisenthal 

 Dec. 1, 2011

 7:11 AM

Image: Stephanie Jones / Flickr

The Eurozone could still end up in smoldering ruins, but now at least we have a fairly clear sense of how European leaders think they can save the whole project.
Recent reports plus Mario Draghi's speech to the European parliament make pretty clear what the game plan is.

Here are the two most important paragraphs from Draghi's speech:

What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

...

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

Draghi's comments dovetail perfectly with reports that first started bubbling up last weekend, that Germany and France would embark on some "stability pact", wherein they would agree to strict fiscal rules, preventing overspending and overindebtedness. Now at first blush a new "pact" sounds like a snooze, but those reports also said something very important, which is that if they did this, then the ECB would be expected to take a much bigger role in financing Eurozone governments.

Now Draghi -- offering up the ECB's perspective -- is saying almost the same thing, and that key line is "other elements might follow." Gee, what "other elements" might the head of the ECB be referring to? Probably ECB intervention.
And that line "the sequencing matters" also is revealing, because it gets at a core concern of the ECB. If it is going to get in the business of backstopping governments, it doesn't want to create moral hazard by funding anyone who recklessly spends and borrows like crazy. So the deal is: European leaders agree to hard, unbreakable rules about spending, and then the ECB agrees to serve as some kind of lender of last resort.
This is the game plan right now. Whether it ever gets this far is still a gigantic quesiton mark.