News via FT Alphaville on the German plans for dealing with naughty EU sovereigns.

From the draft plans outlined in Handelsblatt (article in German):

1. Failing to comply with deficit reduction means temporary loss of EU Structural Funds.

2. Possible irrevocable loss of EU Structural Funds.

3. For serious budget failure voting rights in the European Council could be withdrawn.

4. As a last resort, a managed insolvency proceeding for bankrupt states.

Commentary from RBS on that rather surprising list has a rather amusing forst line which neatly sums up what everyone seems to be thinking :

The last part is gunpowder, gelatine, dynamite with a laserbeam. To see this consider the most likely defaulter: Greece. If Greece can not manage the austerity then it will be pushed into a possible new insolvency proceeding, with markets back to trading recovery prices for bonds.

Government bond investors will naturally see that Greece is not that unique in EMU and that Portugal, Spain & Ireland also have large structural adjustments that look very tough. With a template and roadmap for default in place, investors (not just speculators) will begin to trade these bonds on a recovery price. That can be handled by ECB intervention.

…

In short, the German exit-clause proposal, while superficially sensible, was something perhaps necessary a decade ago but would now take the crisis to another level. It would be another clear flag to get out of EUR assets in general. Like it or not, the destiny of Germany has been wedded to the Euro area, and there is no way to exorcise members without disaster.

Whether the Germans have taken leave of their senses or are just posturing for domestic political purposes is anyone’s guess but it certainly won’t help the Euro after yesterdays short selling ban shock.