Merkel and Sarkozy Push Debt Restraint in Euro Zone

Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, meeting here at the start of a crucial week that will end with a European Union summit meeting on Thursday and Friday, called for amendments to European treaties that would include centralized oversight over budgets and automatic sanctions against countries that violate firmer rules on deficits.

The changes are among the most sweeping proposed since European countries began coordinating their economic policies in the aftermath of World War II. They would effectively subordinate economic sovereignty to collective discipline enforced by European technocrats in Brussels.

“We want to make sure that the imbalances that led to the situation in the euro zone today cannot happen again,” Mr. Sarkozy told a joint news conference. “Therefore we want a new treaty, to make clear to the peoples of Europe that things cannot continue as they are.”

It is unclear if promises of future action will be enough to pacify markets, which have been testing the resolve of European leaders for months. They initially responded with relief on Monday, with stocks and the euro rising, but lost some of those gains after Standard Poor’s put 15 European nations on credit watch because of disagreements about how to tackle short-term and long-term threats to financial stability.

Mrs. Merkel, warmly embracing the French president despite their often testy relationship, insisted that the euro zone must be effectively re-established under a different set of rules. “We want structural changes that go beyond agreements,” she said. “We need binding debt brakes.”

By pressing for a new treaty the French and German leaders took big risks on two fronts. Their proposal threatens to divide the 17 European Union countries that use the euro from the 27 nations that are part of the larger European Union, some of which, like Britain, are likely to reject intrusive budget oversight from Brussels. And it remains uncertain how warmly national parliaments and voters even within the euro zone will embrace the changes.

The two leaders are aiming to develop a clear consensus among the other members of the euro zone that they will push ahead with a new treaty. They appear to be calculating that such a signal of solidarity will be enough to persuade the European Central Bank, the only institution in Europe with enough financial firepower to defend the ability of member states to raise money on bond markets, that it has enough political cover to move more aggressively to protect vulnerable countries like Italy and Spain.

Mrs. Merkel and Mr. Sarkozy did not directly address the role of the central bank, which operates independently. But many European analysts have concluded that the Germans, who have been among the most wary of an expanded role for the bank, will implicitly endorse a bolder intervention in the markets if European nations accept more intrusive rules.

Mr. Sarkozy said the Franco-German aim was to have treaty changes drafted and agreed upon by the end of March. But ratification will take longer. In France, for instance, Mr. Sarkozy will not try to ratify any treaty change until after legislative elections that finish on June 17. Even if he is re-elected president in May, not a sure thing, he may lose his majority in Parliament.

There is another crucial issue, too, which is the process of ratification. If Ireland decides that these changes are fundamental enough to be approved by referendum, it may slow matters further. Ireland rejected the last European treaty in a referendum, before European colleagues forced Dublin to vote again.

And it may be that voters are wary of “more Europe,” and that their growing disaffection has not been overtaken by their concerns over the fate of the euro.

The two leaders, to reach a joint position, did some bargaining on Monday. Mrs. Merkel wanted oversight of national budgets to be exercised by Brussels, with the European Court of Justice the ultimate arbiter, with the power to veto budgets and send them back to national parliaments to review. Mr. Sarkozy, the political inheritor of Gaullism, did not want to give any supranational body that much authority over an elected national parliament, a view shared by other countries, too.

Stephen Castle contributed reporting from Brussels.

Article source: http://www.nytimes.com/2011/12/06/world/europe/leaders-piece-together-an-effort-to-keep-the-euro-intact.html?partner=rss&emc=rss