Brussels, 02/12/2011 (Agence Europe) -French President Nicolas Sarkozy, and German Chancellor Angela Merkel are trying to reconcile their differences ahead of the European summit in Brussels in a week's time where they will be issuing joint statements on how to solve the eurozone debt crisis. They will be suggesting to their counterparts that a Stability Union be set up in the medium-term by boosting budget discipline, or at least this is what emerged from their separate statements on Friday 2 December, one from Berlin and the other from Toulon (France). The leaders of the two biggest eurozone economies will be meeting in Paris on Monday to fine-tune their upcoming suggestions, but they still disagree over key issues like the institutional set-up for getting this stability union running and mass intervention by the European Central Bank to calm the money markets. If a separate treaty for eurozone countries is mooted, that will be hugely unpopular to staunch defenders of the Community method at the European Commission and European Parliament.
Merkel told the Bundestag that it will take years to solve the eurozone debt crisis, comparing the solution to a marathon that is gruelling in the final miles but can be achieved if one is aware of the problems from the start. She therefore called for a stability union, which will necessarily require a budget union based on strict rules, at least for the eurozone. Germany will recommend that the European Commission be given the power to intervene by automatically applying penalties on countries breaking the Stability and Growth Pact, a view backed by the Netherlands, which is also calling for the power to kick countries out of the eurozone if they refuse to comply.
France is now toeing Germany's line on the need for tighter budget discipline. Sarkozy said that if people want more solidarity, they will have to demonstrate more budget discipline. He criticised the fact that it was as long ago as 1974 that France last had a balanced budget. He said that Europe should examine its budgets together and impose faster, stronger and more automatic penalties on countries failing to meet their promises. He said that preventative measures needed to be stepped up to ensure that the abuses seen recently are genuinely a thing of the past. The French president said that France and Germany wanted eurozone nations to introduce a golden rule in their constitutions to rein in public debt. Opposition from the Left prevented him from introducing such a rule in France, but he promised to try again before the end of his term of office (spring 2012). Spain has introduced the said golden rule and Italy and Austria are in the process of introducing it. Sarkozy said the eurozone economies had to converge because if the gaps in living standards, productivity and competitiveness widen further, then the euro will end up being too strong for some and too weak for others, which will destroy the currency.
At the European Parliament on Thursday, the new president of the ECB, Mario Draghi, urged eurozone countries to display monetary union in the form of a new Budget Pact as the best way of restoring credibility (see EUROPE 10507), saying that other elements might follow, which is being taken as a hint that he may agree to the ECB taking a more active line once a Budget Pact has been signed.
New EU treaty. Angela Merkel said on Friday that in her view, Germany should encourage a reform of the EU treaty by all 27 member states to introduce a stability union. In legal terms, a new EU27 treaty could give the European Commission greater latitude to send countries breaking the Stability and Growth Pact before the European Court of Justice.
This approach may take a long time and be quite complicated because non-euro countries fear the creation of a two-speed Europe and the United Kingdom might be tempted to withdraw some powers from Brussels back to London. On Thursday 1 December, Polish Prime Minister Donald Tusk said, however, that he wanted a speedy change to the Treaty (see EUROPE 10507). Speaking in Paris on Friday, British Prime Minister David Cameron told the French president that the survival of the euro is crucial for British business and the UK would not object to any change in the Treaty specifically for the eurozone as long as it did not have a negative impact on the single market.
Sarkozy said that France and Germany were calling for a new treaty, but if that did not prove to be possible among all 27 member states, then the eurozone nations could go it alone and set up a budgetary union outside the EU system. He said that nation states had taken leadership during the crisis because only they have the democratic legitimacy needed to take decisions and European integration happened by governments working together because the EU has to make strategic, political decisions.
The European bailout funds, the current European Financial Stability Fund (EFSF) and its replacement by July 2013, the European Stability Mechanism (ESM), work intergovernmmentally rather than through the Community method, but this does not always mean that they react after the event, said Sarkozy. The July 2011 decision to beef up the EFSF's lending capacity has only been operational since the beginning of November after the long process of ratification by each eurozone nation, which almost came a cropper in Slovakia. Aware of the problems, the French president called for more decisions to be taken by qualified majority voting in the eurozone, particularly ESM decisions.
It is likely that Sarkozy's opting for intergovernmentalism will see little favour among defenders of the Community method. Referring to the State of the European Union speech by the president of the European Commission, Durão Barroso, in September this year (see EUROPE 10462), a Commission spokesperson said on Friday that it would only be possible to solve the crisis by expanding European democracy alongside national democracy. The Belgian leader of the EP's liberal party, Guy Verhofstadt, reacted immediately to Sarkozy's speech, saying the French president was stuck in the past. Verhofstadt said that it was an intergovernmental Europe that had been in power since the beginning of the crisis, a collection of countries each fighting their own corner, and the results were only too obvious. The only way out of the crisis, said Verhofstadt, without destroying the single currency and the single market, was to rally round the Community method, based on solidarity and the common interest.
ECB and eurobonds. Germany is categorical in its dismissal of the idea of the ECB buying up huge quantities of the bonds of countries in difficulty. Merkel said the ECB's main job was to hold back inflation and this was inscribed in the EU treaties. The danger of buying up public debt is that it could spark inflation and at a mini-summit in Strasbourg last weekend (a meeting of Merkozy), she argued that any change to the EU Treaty should not change the rules governing the ECB (see EUROPE 10502). Berlin is also opposed to the pooling of eurozone debt (eurobonds), with Merkel saying that anyone who thinks that eurobonds will solve the debt crisis has not properly understood the nature of the crisis. The German finance minister, Wolfgang Schäuble, said the day before that special funds could be set up in member states for the rescheduling of the excess part of countries' debt without pooling responsibility to pay it back.
Breaking his own rule that France and Germany should not talk about what the ECB should and should not be allowed to do (because the two countries disagree so strongly on it), Sarkozy said that the ECB could play a key role and there was debate about what is possible under the ECB's rules of procedure. He said he didn't want to enter into any detail, but in his view the ECB must remain independent. He said he was certain that the ECB would take action to counter the deflationary risk that is now threatening Europe at a time that it felt was right and in the way it felt was needed. Sarkozy said that nobody doubted that the ECB would take its responsibility seriously and he was pleased that it was starting to do so. (MB/transl.fl)