Is Sarkozy and Merkel’s New Debt Proposal The Beginning of The End To The Euro Crisis?

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Remy de la Mauviniere / AP

French President Nicolas Sarkozy waves goodbye to German Chancellor Angela Merkel as she leaves the Elysee Palace following their meeting in Paris, December 5, 2011.

The details of the campaign by France and Germany to save the euro became a little clearer Monday though substantial questions about it remain as  the week winds toward a European Union summit on the euro crisis summit on Friday. In a joint press conference in Paris Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel laid out the proposals and time frame they’ll present to EU partners in Brussels to save the currency from the crushing debt member nations have accumulated. That Franco-German plan calls for new treaties, new rules, and reinforced discipline to be adopted across the EU, measures that Merkel said will “keep the euro as a stable currency, and as an important contributor to European stability”. Yet despite the bolder contours of their  prooposed rescue project, gray areas about how (and whether) the joint initiative will work remain–chief among those being whether the new actions will be demanded of all 27 EU countries, the 17 members of the euro zone, or only a portion of that later group.

The main elements revealed by Sarkozy and Merkel called for a new treaty to be signed by as many of the EU’s 27 members as possible. The document will commit signatories to legally binding budget deficit limits of 3% of GDP, and guarantee automatic punishment of any governments exceeding deficit and debt ceilings. As part of that, the proposal calls for all signatories to pass “golden rule” deficit limitations into national laws—legislation that would then be vetted by the European Court of Justice to ensure texts fully and legally commit governments to spending restrictions under the treaty. Merkel and Sarkozy said they’ll also call for monthly meetings by euro zone heads of state to manage response to the on-going crisis, based on what Sarkozy called carefully “set agendas that include focus on increasing economic growth.”  The two leaders said they’d send those and other propositions in the plan to EU officials Wednesday, and hope for agreement among as many European partners during the EU summit at week’s end.

“We aim to get all of our proposals approved Thursday and Friday, when we’ll look around the table and see whether we will get to a treaty of 27 or 17,” Sarkozy said–making it clear Germany and France are willing to leave as many EU foot-draggers behind as they have to in pressing ahead with their drive to save the euro. “Things cannot continue as they have up until today. Our preference is for a treaty among the 27 (EU members), so that nobody feels excluded, but we are open to a treaty among the 17 (euro members), open to any state that wants to join us.”

The Franco-German initiative assumes that the clear, emphatic decision by the euro zone’s two largest economies to create new rules (and force them on partners) prohibiting excessive debt in the future will help alleviate the escalating crisis rocking Europe. On the one hand, enforceable new restrictions are intended to prove to markets that governments are already preparing to launch euro management once the urgency is over. By addressing structural and fiscal differences within the euro zone, Sarkozy and Merkel hope to quell market fears that have turned Europe’s debt problem into a full-blown economic crisis by driving borrowing costs up to untenable levels. Meanwhile, the plan to have the new accords hammered out and ready for signing by March 1 is intended to signal the Franco-German counter-offensive to save the euro isn’t going to wait long for doubters or debating before moving on.

“At the summit we need to regain some of this confidence and trust in our word that we’ve lost,” Merkel said. “We want structural changes which go beyond agreements. We need binding debt brakes that can be verified.”

But in opting for the far faster option of creating a new treaty rather than revising current EU texts, the Franco-German couple will produce a dilemma for non-euro countries like the UK, Poland, and Denmark: whether to give up a degree of national budgetary autonomy as part of a wider EU debt-prevention measure, or risk seeing themselves further sidelined within the EU by euro members moving towards even greater fiscal convergence. Also unaddressed was another question: what might happen if any current euro nation refused to sign the new treaty? Would they be forced out of the single currency—or would a refusal by Greece, Portugal, Malta or others suffice to shatter the entire euro project?

Apparently, the idea of sickly euro countries refusing the orders of stronger partners looking for a way out of the crisis isn’t one either Paris or Berlin takes seriously. Yet in finding common ground, Merkel and Sarkozy had to make significant concessions to one another. Merkel, for example, held firm on German demands that greater fiscal discipline be legally accepted via treaties—and reinforced through the passage of national “golden rule” laws. But elsewhere, she bent to French sovereignty concerns over an independent European body being able to invalidate proposed national budgets ruled to exceed new deficit rules. By contrast, while Sarkozy may have won his demand that heads of state form an “economic government” with monthly meetings to overcome the crisis, he reliquished two ideas Germany has repeatedly called verboten: creation of collective “euro bonds”, and use of the European Central bank (ECB) as the guarantor of all euro zone debt.

“Germany and France are not going to pay the debts of other nations without being able to control the debt issues of other nations,” Sarkozy said–backtracking on France’s earlier position on both euro bond and greater ECB intervention in the crisis—as Merkel looked attentively on. “And we restate our previous position of confidence in an independent ECB, without any comment on (its actions) either positively, or negatively.”

From such compromise came Monday’s plan. It remains to see what reception that gets Friday in Brussels—and in markets across the world awaiting that summit. If all goes well, the Sarkozy-Merkel initiative may wind up being hailed as the beginning of the end to the euro crisis. If it fails, it will probably be remembered as the last step to save the single currency. And the only recourse then may be getting the ECB to come in as rescuer-in-chief.