EURO ZONE DEBT CRISIS:FRANCE AND Germany will present EU leaders with a plan to enshrine budget discipline in a new treaty after President Nicolas Sarkozy and Chancellor Angela Merkel struck a deal they hope will bring the debt crisis under control.
The Franco-German proposals, agreed after talks in Paris yesterday, rule out imposing losses on private investors in any future bailouts and include more automatic penalties for governments which fail to keep their deficits under control.
A tough budget discipline regime is seen as a crucial element of the “fiscal compact” demanded recently by Mario Draghi, president of the European Central Bank, and could clear the way to aggressive action by the bank to ease the pressure on euro zone sovereign debt.
The two leaders said they hoped to win agreement on the proposals from all 27 EU states at a summit in Brussels later this week, but were open to proceeding as a smaller group. “Our preference is for a treaty with all 27 so that no one feels left out, but we are ready to move ahead with a treaty for 17, and open to others who wish to join us,” Mr Sarkozy said.
The commitment not to ask private investors to bear some of the losses in future bailouts is a shift in policy by Germany, which had previously insisted that clauses on potential burden-sharing be included in all bonds issued from mid-2013.
Mr Sarkozy said the write-down taken by Greek bondholders was a unique case and “will not happen again”. “What we want, with the chancellor, is to say to investors around the world that in Europe the rule is that we pay back our debts, reduce our deficits, restore growth,” he said.
Investor fears that a Greek-style “haircut” could be imposed in the case of other heavily indebted countries such as Italy or Spain had contributed to a sharp increase in their bond yields. Dr Merkel said it was imperative to show that Europe was “a safe place to invest”. Berlin’s view prevailed on the idea of jointly issued eurobonds, however. “We reject the idea of eurobonds,” Dr Merkel said.
Mr Sarkozy rowed in behind this, saying the two sides were “completely in agreement in saying that eurobonds are not the solution to the crisis”. The revised treaty would permit more automatic sanctions against states that breach an existing deficit limit of no more than 3 per cent of gross domestic product, unless a qualified majority of states voted against the penalty.
That would reverse the current system, where a majority of states must vote to launch disciplinary procedures.
The new treaty would also enshrine a budget-balancing “golden rule” in national constitutions across the euro zone, although no detail on proposed wording was provided.
Mr Sarkozy said the European Court of Justice could rule on whether “golden rules” adopted by euro zone states conformed to the new treaty, but would not be able to reject national budgets.
Under the Franco-German plan, the European Stability Mechanism, which will replace the current European Financial Stabilisation Fund, will be brought forward from 2013 to 2012. Decisions on bailouts under the mechanism will be taken by qualified majority rather than unanimity, which would restrict the ability of a smaller state to block a rescue.
The plan envisages monthly meetings of heads of state and government throughout the crisis.
Dr Merkel and Mr Sarkozy declined to comment on the ECB, sticking to a recent agreement not to undermine the bank’s independence by making public demands of its leadership. They will send the details to European Council president Herman van Rompuy tomorrow, and hope to have a deal on treaty changes by next March.