Reuters/Paris
The leaders of France and Germany unveiled wide-reaching plans yesterday for closer eurozone integration, including deficit limits and biannual summits, but said joint euro bonds could only be a longer-term option.
Merkel and Sarkozy: Wide-reaching plans
Under heavy pressure to restore confidence in the eurozone following a dramatic market slump, President Nicolas Sarkozy and Chancellor Angela Merkel stopped short of increasing the eurozone’s EFSF rescue fund but vowed to stand shoulder-to-shoulder in defending the single currency.
Their message was that the focus should be on further economic integration rather than signing bailout cheques.
In a further rap to financial market players, whose panic-selling this month wiped some $4tn off global stocks and sparked a temporary ban in Europe on short-selling, the two leaders also proposed taxing financial transactions.
In plans to be sent today to European Council President Herman Van Rompuy, the two leaders want a president to be elected to represent the eurozone and twice-yearly meetings of the leaders of the embattled 17-nation bloc.
“We have exactly the same position on euro bonds,” Sarkozy told a joint news conference with Merkel after their talks. “Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning,” he said.
The joint proposals were still ambitious, given Germany’s past reticence on ideas like institutionalising regular summits of eurozone leaders, and respond to criticism that market confidence in the eurozone has been undermined by a cacophony of differing policymaking voices in recent months.
Julian Callow, senior European economist at Barclays Capital, said that while markets needed to see “more flesh on the bones” of the proposals, it was significant that the two leaders had broken into the August holiday period to meet.
“They are pledging a commitment to economic governance which is a step forward and there is also a commitment to a debt brake, although it remains to be seen whether that will be significantly strong,” he said.
“Each side is surrendering some sovereignty which in the end could pave the way to much closer political union and so prepare the ground for the issue of euro bonds.”
The French and German proposals will be evaluated by Van Rompuy, who has been charged with putting together a package on economic co-ordination for an EU summit in October.
The two leaders—under pressure to convince markets the eurozone is sound or risk watching it unravel—said their first proposal was for “a real economic government” for the eurozone, with a president elected for two-and-a-half years.
“Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it. And it is entirely clear that for this to happen, we need a stronger interplay of financial and economic policy in the eurozone,” said Merkel, who was due to have a working dinner with Sarkozy.
Sarkozy said that if adopted, their proposal that eurozone governments should enshrine deficit-limiting rules into their constitutions would be obligatory, not optional.
“The euro has allowed us a lot of economic progress but the euro is not just a right, it’s a set of rules, a duty, a discipline,” he said. “Consequently if the rule is to be adopted by the 17, it will not be an optional rule but obligatory.”
Many experts believe the only way to ensure affordable financing for the bloc’s most financially distressed countries would be for the euro area to issue joint euro bonds.
Officials in Paris and Berlin played down expectations ahead of the meeting, saying euro bonds would not be on the agenda, but markets were still disappointed.
“Rather than the additional check writing by core European governments that certain markets were looking for, including a new euro bond, they are getting a fiscal discipline golden rule, stronger economic governance, and a new financial transactions tax,” said Mohamed el-Erian, co-chief investment officer at Pacific Investment Management Co in California.
