As European Union leaders prepare to meet in Brussels this week to create a lasting lending facility for indebted countries, France and Germany have surprised observers by stating their openness to discussing whether countries that share the euro currency should harmonise fiscal policy.
Berlin has opposed calls by Spain and others to move towards a full-fledged 'fiscal union' in the euro zone, arguing that tax and employment policies should remain fully decided at national level.
However, it appeared last week to have agreed to a limited form of policy coordination between the 16 nations that share the euro currency.
Germany and France pledged on Friday (10 December) to better align their tax and labour policies to foster convergence in the euro zone, although little detail was offered.
"We have agreed to the convergence of German and French tax policies and I thank the German chancellor for this opening," said French President Nicolas Sarkozy after a meeting with Chancellor Angela Merkel in the southwestern city of Freiburg.
"We are talking about labour law, about tax law, and if we are to improve the coherence of the economic aspects of the euro zone, then we should target these issues step by step and propose solutions," added Merkel.
The two leaders said they would present "structural" proposals next year in the area of economic coordination, but declined to elaborate.
However, Merkel and Sarkozy rejected calls to increase the bloc's rescue fund and dismissed demands to issue joint sovereign bonds in the euro zone as a way of reducing the borrowing costs of indebted nations.
Building on this statement, German Finance Minister Wolfgang Schaeuble added on Sunday that a decision taken at the euro's creation not to integrate state finances into a European framework could be reviewed.
"The basic decision was for fiscal and budgetary policy to be decided on the national level. If that is to be changed, then we can talk about it," he told the Bild am Sonntag newspaper.
The rare opening comes as EU leaders prepares to agree a permanent rescue mechanism for the euro at a summit in Brussels on Thursday and Friday.
The plan is to be agreed as leading analysts warm that the EU needs more than bailout plans to reassure volatile markets.
Most economic historians now "believe a monetary union would fail unless it develops into a fiscal union," writes Wolfgang Münchau in today's Financial Times, detailing how "a mini-fiscal union could end instability".
The proposal, seen as "utopian" by many, now appears to have come one step closer to fruition.
"In ten years we will have a structure that corresponds much stronger to what one describes as political union," said Schaeuble in the Bild am Sonntag interview.
André Sapir, a leading EU adviser and economics professor, believes Europe needs to address a fundamental power vacuum at its heart so that investors can trust statements on public finances.
For years, Greece has been able to hide its huge public debt and budget deficits because nobody has stepped up to denounce it.
"I would like the European Commission to tell the truth […] The truth was known but nobody was telling the truth," Sapir said.
At a recent event in Brussels, Sapir took stock of recent reforms to the EU's economic governance, including an agreement to vet member states' draft annual budgets before they are adopted by national parliaments.
The first semester of budget surveillance will start in January 2011 and will include an early peer-review system aimed at preventing a repeat of the Greek sovereign debt crisis. Member states would then finalise their budgets in the second half of the year (see proposed timeline).
But Sapir doubted that this would be enough. "You are saying because you have better procedures you will tell the truth, but I highly doubt that," Sapir said, criticising recent proposals to strengthen the EU's hand in managing eurozone debt problems.
"Attaching oneself to procedures is a sign of weakness. I would rather see a strong European Commission that comes up with an analysis for the Eurogroup and that goes to the Council and makes a strong argument," said Sapir.
Commission the guardian, not the leader
The European Commission did not reject Sapir's views and cited one prominent example showing how in the past the EU executive's economic decision-making was undermined by political cronyism in the European Council.
Martin Lach from the Commission's Economic and Financial Affairs directorate pointed to Italian Prime Minister Silvio Berlusconi's powers of persuasion, which he used to shelter Italy from the Commission's scrutiny at the beginning of the decade.
When Italy overshot the EU's agreed 3% of GDP deficit ceiling, member states did not agree to launch a so-called excessive deficit procedure against the country despite the Commission's insistence.
"The Council [of Ministers] did not act because the prime minister gave his word of honour. A few years later Italy was in fact in an excessive deficit procedure," Lach said.
Lach insisted that the European Commission was merely the guardian of the EU treaties, and not the decision-maker.
"I am not sure the European Commission is the best actor to tell the truth," said Janis A. Emmanouilidis, a political analyst at the European Policy Centre, hinting that member states' contributions to the EU budget would ultimately colour the EU executive's decision-making.
Draft conclusions intended for upcoming leaders' talks this Thursday reveal scant details of plans to create a permanent loan facility, which will require a change in the EU treaties.
As already revealed, bondholders will likely face haircuts and collective action clauses should help spread the private cuts more equally.
"In the unexpected event that a country would appear to be insolvent, the member state has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices," read the draft summit conclusions, seen by EURACTIV.
The draft text also set a timeline for treaty change, stating: "The consultation of the institutions concerned should be concluded on time to allow the formal adoption of the decision in March 2011, completion of national approval procedures by the end of 2012, and entry into force on 1 January 2013."
The draft plan also mandates the use of collective action clauses, which allow creditors to vote on changes to the terms of payment such as maturity extensions, interest-rate cuts and haircuts if the debtor is unable to pay.
In practice, collective action clauses force minority bondholders to accept any debt restructuring terms agreed with majority bondholders, speeding up the process of debt restructuring.
"This is too little, too early," Sapir said.