Merkel, Sarkozy Propose Eurozone Governance

The French and German leaders favor firmer debt and deficit limits.

The political leaders of France and Germany unveiled plans for closer European integration on Tuesday, including firmer debt and deficit limits and regular summits of eurozone nations to achieve “a real economic government” for the single currency zone.

After a bilateral meeting in Paris with French president Nicolas Sarkozy, Angela Merkel, the German chancellor, stressed that the eurozone needed “a stronger interplay of financial and economic policy.” Wide disparities in fiscal policy and economic competitiveness between the eurozone “core” and peripheral countries like Greece, Ireland and Portugal have undermined the stability of the monetary union and contributed to its spiraling debt crisis.

Germany and its allies Austria, Finland and the Netherlands have long resisted expansion of existing bailout mechanisms for the countries that are teetering on the brink of default, fearing that it might undercut their sense of urgency in implementing the sort of austerity measures that are deemed necessary in Northern European capitals. A majority of voters there is opposed to financial support for weaker countries in the south altogether where pension and welfare provisions tend to be far more generous than in the rest of the EU.

The euro is “not just a right,” the French president said on Tuesday. “It’s a set of rules, a duty, a discipline.” In order to enforce that discipline, eurozone leaders should meet biannually under the leadership of European Council President Herman Van Rompuy and coordinate fiscal policy.

Sarkozy said that France and Germany would push other eurozone governments to enshrine deficit limits in their constitutions. Italy and France are already considering balanced budget amendments after their creditworthiness was called into question by financial markets last week. Italy, which is the third largest economy in the eurozone, could be especially vulnerable as its public debt equals some 120 percent of its gross domestic product.

Merkel and Sarkozy previously proposed a pact that aimed to boost European competitiveness. The package included raising the retirement age across the eurozone, abolishing the indexation of wages to inflation, harmonizing corporate tax rates and instituting a “debt brake” that would limit countries’ ability to borrow.

In March, eurozone leaders agreed to empower the European Commission with supervision of existing fiscal commitments although their implementation remained the prerogative of national governments.

The 1997 Stability and Growth Pact set a deficit limit of 3 percent of GDP and a debt limit of 60 percent of GDP. Nearly all countries that are subject to it, including France and Germany, have broken those rules at some point.

Whether the announcement of firmer fiscal policy will manage to calm financial markets is far from certain. Many experts believe that the only way to ensure affordable financing for the bloc’s most distressed economies would be for the euro area to issue joint sovereign bonds but Germany and the Netherlands have so far resisted the notion.

Merkel and Sarkozy will have to find consensus for their plans which peripheral countries are likely to be wary of. European Union member states outside of the single currency zone could also prove an obstacle. Poland in particular is worried that closer eurozone integration could leave it sidetracked. Denmark and Sweden also fear isolation. Unlike Poland, they have no interest in ultimately joining the euro though.

Enhanced European economic governance is also far from popular with the northern and French electorates. Both the French and German governing parties lost heavily in regional elections this year, in part because voters were frustrated with the financial rescue of Greece. The Dutch liberal-conservative coalition is dependent on opposition support for its European policy while Slovakia previously warned that its legislature might not vote in favor of expanding the permanent bailout fund, let alone consent to new sweeping powers concentrated in Brussels.