German-French drive to unify euro economy hits obstacles

4th February 2011, Comments 0 comments

Germany and France launched a radical drive Friday to unify the diverse, debt-ridden eurozone economy, but plans to stifle wage growth provoked an immediate backlash.

In exchange for further aid to partner governments struggling to balance their books, the 17-nation currency area's major powers want common policy goals and restrictions imposed by all, which they say will make the eurozone a more competitive, more efficient economy.

"We want to bring in a competitiveness pact and step by step bring about a more linear shared growth," German Chancellor Angela Merkel said in a joint declaration for the cameras alongside French President Nicolas Sarkozy at a European Union summit otherwise preoccupied with Egypt.

Merkel said they had asked EU president Herman Van Rompuy to consult with other states in order to fix a decision at the next 27-nation EU summit on March 24 and 25, meaning "we would have to reach agreement within the eurozone" first.

Sarkozy underlined that this would mean "a greater integration" than ever before. A special eurozone summit is likely to be needed earlier next month.

However, the much-trailed plan quickly stirred the passions of opponents.

Belgian Prime Minister Yves Leterme said he was "absolutely not in agreement" with the plan's call for inflation index-linked wage rises to be abolished.

His caretaker government is on course for accumulated national debts of almost an entire year's economic output in 2011, but he insisted: "We will not allow our social model to be undone."

As well as labour market reform, France and Germany want convergence in corporation tax regimes.

That would have the effect of rubbing out a competitive advantage secured by Ireland and others -- Dublin's low percentage having already come under pressure during negotiations on its December bailout.

Other changes would see retirement ages evened out, qualifications recognised across linguistic borders, to help labour mobility, and a common system for managing banks in trouble.

At a time when one in 10 are unemployed across the eurozone, amid massive cuts in public spending, the head of the European Trades Union Confederation said Germany and France were out to trample over the little guys.

"This is not a competitiveness pact, it's a perverse pact towards lower living standards, greater inequalities and more precarious employment conditions," said John Monks.

According to a French government insider, "Germany is not always the best performer," the source saying the aim was to "identify the key domains" in which concerted action could help and that no reforms would be implemented before 2012.

Support did, however, come from one of the other star eurozone economic performer.

Netherlands Prime Minister Mark Rutte characterised the goal as "not a race to the bottom, but a race to the top."

The debate erupted as leaders move to strengthen a 440-billion-euro ($600 billion) rescue fund, with Greece and election-mode Ireland each seeking to renegotiate their bailout terms.

First of all, the EU wants to make the rescue fund, the Luxembourg-based European Financial Stability Facility (EFSF), able to lend its full amount. At present some 200 billion euros must be kept back as a cash buffer.

Leaders will also consider letting the EFSF buy bonds from countries struggling to raise funds cheaply on markets, or lend the likes of Greece cash to buy back bonds that have already lost up to 30 percent of their value trading on open markets.

Some leaders also want an early bailout for Portugal or even a sort of overdraft for Spain.

The Merkel-Sarkozy plan envisages partners introducing ceilings on permissible national debts, mirroring a constitutional "brake" in Germany and new plans for France.

Diplomats warned, though, that southern eurozone nations, including Portugal, fear being railroaded down an even more painful path of reform.

© 2011 AFP

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