French President Nicolas Sarkozy and German Chancellor Angela Merkel presented a common front yesterday (6 May) on a number of initiatives to tighten control of eurozone countries' finances and stabilise financial markets.
In a joint letter, they recommend stricter monitoring of eurozone member states' debt, a further clampdown on credit rating agencies, and the establishment of a financial sector bailout fund paid for by banks.
Merkel also seems ready to abandon her idea of ejecting undisciplined eurozone members from the single currency, apparently yielding to demands from Paris.
The joint statement comes as eurozone leaders prepare to meet in Brussels to reform the rules of the common currency and prevent the Greek debt crisis from spreading to other eurozone countries.
The letter reiterates a tougher approach against public debts. The two leaders propose to extend surveillance "to structural issues and competitiveness," not only excessive deficits as is the case today.
They also suggest "strengthening the effectiveness of EU recommendations on economic policy". However, not all eurozone member states are likely to support the plan (EurActiv 06/05/10).
Crackdown on rating agencies
"We should take into consideration the possible role of credit rating agencies in amplifying crises and their impact on financial stability," the letter underlines.
Credit rating agencies stand accused of worsening the Greek crisis by fuelling speculation in the last few weeks. The downgrade by Standard & Poor's of the Greek sovereign debt rating sent the country into a tailspin before details of the long-awaited European rescue plan were made public.
This move "should make us think about the role of credit rating agencies in the propagation of a crisis," the letter reads.
Despite the tough EU line, Moody's yesterday (6 May) highlighted a risk of contagion in the Greek debt crisis, which it warned could spread to five other EU states: Spain, Portugal, Ireland, Italy and the UK.
In their letter, Sarkozy and Merkel give their backing to existing EU efforts to regulate rating agencies but they also suggest reconsidering "the rating methods of sovereign debt". Trade unions want a complete ban on sovereign ratings.
Bank-funded bailout fund
Merkel also seems to back French proposals to set up a private fund to rescue banks in case of future default. "Member states should not be forced to bail out banks," reads the letter, adding: "We will work on a system of fair contributions from the financial sector."
Michel Barnier, the French EU commissioner in charge of financial services, had suggested establishing such a fund in March (EurActiv 22/03/10).
The letter expresses a joint commitment "to preserve the unity of the euro zone," which the French read as a conciliatory message from Merkel after her suggestion to expel undisciplined eurozone members (EurActiv 18/03/10).
Germany is also strongly campaigning to cut regional aid for states which regularly breach the rules of the Stability and Growth Pact. But France is reluctant to take such a tough line on the issue as it has not always been an irreproachable member of the bloc itself. It is also a major beneficiary of EU funds.
Moreover, Merkel has expressed support for more radical reforms like creating a European Monetary Fund or applying sanctions on eurozone member countries that repeatedly break the bloc's economic guidelines, suggesting for example that their voting rights in the EU Council of Ministers could be suspended.
However, that would require changing the EU treaties, and France prefers more straightforward reforms like amending the Stability and Growth Pact.