EU unity at stake as Paris, Berlin unveil euro plan

Merkel Sarkozy Paris.jpg

A Franco-German deal yesterday (5 December) to salvage the euro and address the European debt crisis was eclipsed by warnings that the countries may lose their triple-A credit ratings. Meanwhile, Poland vowed to fight for the EU's unity in the face of an emerging two-speed Europe.

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.

Positions

In a television interview minutes after S&P said it had placed eurozone countries on review for a possible downgrade, French Finance Minister François Baroin said the agency's move had not taken into account joint proposals made by French president Nicolas Sarkozy and Chancellor Angela Merkel earlier in the day, Reuters reported.

"The problem is a problem of confidence (in the euro zone) ... We need more integration on a budgetary level," Baroin said on France 3 television. "We do not need a third austerity plan. We don't need additional measures. What we need is to reinforce the coordination of European policy."

Baroin said the European Union summit to be held on Friday would be "decisive" as the 17 euro zone economies look to restore confidence in the markets.

He also said that France would not need to inject public money into its banks.

Morgens Hauschildt, Regional Director of Western Union Business Solutions in Vancouver, British Columbia, commented on the S&P warning:

"I think it's turning up the pressure on the EU but I don't think it's a surprise. It's very difficult. This situation is not going to go away. But they need to stem the bleeding. The market is very quiet even after the S&P news. That's because they are set for the ECB and the EU meeting on Friday. The focus will be on the ECB Thursday to see if they'll do more toward being lender of last resort. And if Merkel and Sarkozy are going to make a new treaty, that could help, but it won't solve it all."

Commenting on the outcome of the meeting, Green co-presidents Rebecca Harms and Daniel Cohn-Bendit expressed their dissatisfaction as the deal failed to answer core questions regarding the eurozone issues with a special mention to the rejection of Euro bonds.

"There is an overriding sense of déja-vu, as today's outcome continues the blinkered focus on austerity and fiscal discipline, while ignoring the urgent need for a clear statement of solidarity in the Eurozone. The Merkozy deal completely falls short of what is needed to draw a line under the sovereign debt crisis, whether as regards the urgently-needed measures to stanch the contagion or the long-term solidarity measures needed to end the doubt surrounding the Euro's future, namely a commitment to Euro bonds. "

"The approach of Merkel and Sarkozy also continues to undermine the democratic process in Europe. The Greens in the European Parliament will fight against this democratic roll-back and expect the European Council to correct this aberration."

Background

Some EU leaders, including German Chancellor Angela Merkel, have argued that a treaty change could help enforce fiscal rules to avoid repeats of the debt crises plaguing members of the eurozone.

Making treaty changes has proven cumbersome. The most recent example was Lisbon Treaty, which was eventually ratified by all 27 member states after heated debate and two referendums in Ireland.

Article 136 of the Treaty on the Functioning of the European Union (TFEU) says eurozone countries may "adopt measures specific to those member states whose currency is the euro", for example:

  • "to strengthen the coordination and surveillance of their budgetary discipline";
  • "to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance."

However, more recently Germany and France have been exploring radical methods of securing deeper and more rapid fiscal integration among eurozone countries, aware that getting broad support for the necessary treaty changes may not be possible. 

Timeline

  • 8 Dec.: EU summit starts at 18.45hrs Brussels time and continues over the next day.
  • 1-2 March 2012: EU summit to agree on treaty change text, with ratification to follow in each member state agreeing to the new rules.

Further Reading

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