Franco-German 'stability pact': A coalition of the willing to save the euro?

The tighter fiscal surveillance would aim at stopping errant countries like Greece from letting their public deficit slip, and lay the foundations for rebuilding the eurozone.

"We need rules and more binding and ambitious commitments for the member states of the euro area," say French President Nicolas Sarkozy and German Chancellor Angela Merkel in a joint letter circulated to EU leaders yesterday (7 December).

The Franco-German letter gives details of a new "excessive deficit" procedure on member states which let their public deficit break the 3% GDP limit written down in the Stability and Growth Pact.

These would include new "automatic sanctions" that can only be overturned by a qualified majority of countries that share the euro currency.

The tighter fiscal surveillance rules would be enshrined in a new treaty submitted for approval to all 27 member states of the European Union in March 2012.

"Otherwise, states whose currency is the euro will go ahead," the two leaders warn, stating their determination to forge a new treaty regardless of opposition.

A coalition of the willing?

It is not clear yet whether the other eurozone countries will buy in to the Franco-German arm-twisting tactics at the summit today. Ireland, Slovakia and Finland, for different reasons, have taken time to ratify similar agreements in the past and might prove difficult partners once again.

But France and Germany say in their joint letter that they are determined to go ahead "with the member states that have the will and the capacity to go forward," suggesting that an ad-hoc agreement might be forged outside the EU framework with a 'coalition of the willing' of sorts.

"We will work to ensure that this new agreement is incorporated into the Union's law as soon as possible," Merkel and Sarkozy write.

European federalists in the Spinelli Group denounced the Franco-German push as a "coup d'état" and warned that such an approach would wreak havoc on the financial markets.

"The markets will immediately attack those who do not form part of [this group], with dramatic consequences for them, for the euro area and the EU as a whole," says the Spinelli Group, a federalist formation which lists Italian Prime Minister Mario Monti among its most prominent supporters. 

Economic convergence

Alongside the new fiscal surveillance rules, France and Germany are also proposing a new decision-making structure to bring the economies of the eurozone closer together, seen as a precondition for introducing Eurobonds that would mutualise the eurozone's debt.

"Alongside the single currency, a strong economic pillar is necessary, based on strengthened governance to ensure fiscal discipline and higher growth," the letter says, arguing that "the current crisis has clearly highlighted the shortcomings of the architecture of the Economic and Monetary Union (EMU)."

Policies under this economic pillar of the EMU would encompass a series of proposals that are already on the table but which are currently blocked by some reluctant member states.

These would include provisions strongly resisted by Britain, such as the coordination of labour market policies as well as financial regulation. An existing proposal for a common consolidated corporate tax base (CCCTB) and a financial transactions tax (FTT) – both resisted in London and Dublin – would also fall under this category.