Standard & Poor's yesterday warned that it may carry out an unprecedented mass downgrade on the credit ratings of eurozone countries if EU leaders fail to reach agreement on how to solve the region's debt crisis at their 8-9 December summit.
S&P placed the ratings of 15 eurozone countries on credit watch negative – including those of top-rated Germany and France, the region's two biggest economies – and said "systemic stresses" are building up as credit conditions tighten in the 17-nation region.
French President Nicolas Sarkozy and German Chancellor Angela Merkel, who met in Paris in preparation for the EU summit, responded to the S&P warning by saying they were united in their determination to do everything necessary to secure the stability of the eurozone (see the full transcript of their joint press conference, in French).
The objective is to enshrine tougher budget discipline rules in a new treaty to be signed in March next year and submitted for subsequent ratification, the two leaders said.
The EU summit on 8-9 December will give an opportunity for a "round table" on the Franco-German proposals, Sarkozy said. "Our preference goes for a treaty of 27 so that no one feels excluded from the Franco-German process. But we are quite prepared to go through a treaty at 17, open to all states that would like to join," he said in reference to the 17 countries that share the common currency.
Little tangible results
But the Franco-German meeting produced little tangible results and presented no new ideas. Basically, Merkel and Sarkozy agreed that budget discipline should be strengthened across the eurozone, and that a treaty change was necessary to secure the stability of the currency union.
Details of the Franco-German agreement include:
- Automatic sanctions: In case of non-compliance with deficit rules, countries should be subject to automatic sanctions, which will require a majority of 85% to overturn.
- Golden rule: All EU member states, but in particular the 17 eurozone members, should adopt uniform debt limits in their respective constitutions. The European Court of Justice (ECJ) will arbitrate in case of a dispute, and should have the right to declare national budgets illegal (without the possibility of rejecting them, however).
- Euro zone heads of state and governments will meet once a month as the eurozone’s economic government.
- European Stability Mechanism (ESM) to start end-2012 instead of 2013.
- No Eurobonds or changes to the role of the European Central Bank (ECB) as a lender of last resort.
At a joint news conference in Paris, Sarkozy said one of their aims was to have automatic sanctions imposed on a country if it breaches the EU rule that a budget deficit should not be bigger than 3% of GDP. Such a measure to enforce the Maastricht rules for the stability of the euro has been long advocated by the EU Commission, but so far rejected by Paris and Berlin.
Merkel and Sarkozy also agreed the European Court of Justice could rule on whether eurozone states had implemented the fiscal rule properly in national law, but would not be able to reject national budgets.
"Budgets are our concern," Merkel said, apparently rejecting a community approach on budget rules.
The German chancellor appeared to have prevailed in her opposition to the issuing of sovereign bonds guaranteed jointly by all eurozone countries, as well as for plans to give new powers to the European Central Bank.
Merkel and Sarkozy also agreed that the future permanent rescue fund for the eurozone, the European Stability Mechanism, should be governed by International Monetary Fund principles and procedures.
They said they wanted a treaty change to be agreed in March and ratified after France wraps up presidential and legislative elections in June.
François Hollande, the front-runner of the Socialist party for the 2012 presidential election, strongly opposes the push of the centre-right to enshrine a 'golden rule' in the country's constitution aimed at limiting budget deficits.
'Lowest common denominator'
Guy Verhofstadt, former Belgian prime minister and leader of the liberal ALDE group in the European Parliament, blasted the Paris summit results.
"This is just their lowest common denominator and nothing like the comprehensive package for economic and fiscal union that is required to convince the markets that Europe is serious about tackling its long-term debt issues," Verhofstadt said.
In the meantime Poland, which holds the EU's rotating presidency, circulated a paper, titled "Preserving the integrity of the European Union while strengthening euro area governance".
All EU countries to participate to euro meetings?
Warsaw argues that measures strengthening the economic governance of the euro area should also guarantee that the integrity of the European Union as a whole will be preserved.
This is the second time in recent days that Poland has called on major players to avoid splitting the EU in tackling the eurozone crisis. A major speech by Polish Foreign Minister Radek Sikorski made waves in EU circles in recent days.
"The strengthening of the economic governance of the euro area … should not create exclusive structures that risk deepening potential divisions but be inclusive and based on willingness to cooperate and observe agreed rules," Poland argues.
Warsaw also insists that the strengthened economic governance should be "inclusive". "All member states should be allowed to participate in discussions, but only euro area member states shall take part in the vote," Poland proposed.
According to the paper, this principle should be applied at all levels, in particular at the euro summits and the Eurogroup meetings.
If adopted, such a measure would greatly help the coming Danish EU presidency, in charge of putting in place a negotiating framework for the EU's next budget for 2014-2020.
Like Poland, Denmark is excluded from Eurogroup meetings as the two countries do not use the common currency.