[dropcap]M[/dropcap]aking budgetary discipline legally binding is a step in the right direction for Europe. Not only is it necessary to reduce over-indebtedness and unsustainable social welfare programs, it could be the reassurance the ECB needs to make larger scale bond purchases. But whether these potential purchases can stem rising yields remains to be seen. It may take a lot more firepower (i.e. officially stating the ECB will backstop Europe) to reinstall confidence into markets.
[quote]Euro-zone leaders are negotiating a potentially groundbreaking fiscal pact aimed at preventing the currency bloc from fracturing by tethering its members even closer together. The proposal, which hasn’t yet been agreed to, would make budget discipline legally binding and enforceable by European authorities. Officials regard the moves as a first step toward closer fiscal and economic coordination within the currency area. That would mark a seminal shift in the governance of the 17-nation euro zone. European officials hope a new agreement, which would aim to shrink the excessive public debt that helped spark the crisis, would persuade the European Central Bank to undertake more drastic action to reverse the recent selloff in euro-zone debt markets.[/quote]
Read the entire article in the Wall Street Journal.