European Council Divided on Treaty Reform

European leaders discuss new measures to ensuring fiscal prudence.

European leaders met in Brussels on Thursday to discuss tighter budget regulation for members of the eurozone. France and Germany have teamed up to try to change existing treaty and create a permanent system aimed at averting sovereign default.

Europe has been pondering tougher budget rules since the financial crisis nearly bankrupted Greece and forced other nations, including Italy, Ireland and Spain, to plunge deep in the red this summer.

The existing Stability and Growth Pact which has been in force since 1997 places limits on deficit spending and debt and allows members that are in violation of these rules to be fined. Even though many countries, France and Germany included, have waved the rules several times during the past eleven years, no one has ever dared enact to sanctions yet.

The European Commission proposed to sanction eurozone members last month to alleviate national leaders of the burden.

The Commission’s proposal divided Europe along now familiar north-side lines with Germany and the Netherlands in favor and France and Italy leading the no camp from the south. In their trilateral meeting with Russian president Dmitri Medvedev two weeks ago, Chancellor Angela Merkel and President Nicolas Sarkozy apparently agreed to compromise, with the French insisting that national governments have the final say in any sanctioning regime.

Merkel has since suggested that Europe may need to revise existing treaty in order to accommodate stricter budget rules. Her coalition partners, the liberals, are especially adamant about punishing fellow eurozone states that submerge themselves in debt. Her proposal to temporarily strip countries that run high deficits of voting rights met with strong opposition from both the Brussels establishment and many of the chancellor’s European colleagues. European Commission President José Barroso characterized the plan as “unacceptable” and “not realistic” while speaking to reporters shortly before the summit commenced.

Finland and Sweden have cautiously expressed support for tougher rules while Britain, though opposed to transferring more power to Brussels, is unlikely to block proposals if they only affect the eurozone. But besides France, which agreed to back the Germans in exchange for their support for watered down sanctions, few member states have warmed up to the prospect of revising the Lisbon Treaty which took many years of painful process, including several failed referendums, to enact. The European Commission is similarly wary of having to renegotiate one of the union’s farthest reaching of agreements in recent memory.

Germany wants all changes in force before 2013 when the EU’s temporary mechanism for handling debt crises expires. In May, in order to save the euro, member states gathered €750 billion in stabilization funds in conjunction with the International Monetary Fund. These billions in loan guarantees can be made available when another eurozone member after Greece is threatened with bankruptcy.

There is also discord on raising Europe’s budget for the next fiscal year with the British and Dutch most vocally opposed to spending more money on Brussels — even though the item is not officially on the agenda. Austria, the Czech Republic, Denmark, Finland and Sweden have also voiced concern although together, these countries are three seats short of a majority in the Council to effectively block the budget.