Germany, France in push for 'fiscal union' to save euro

2nd December 2011, Comments 0 comments

German Chancellor Angela Merkel kicked off a key week of talks on saving the euro by laying out a vision Friday for European "fiscal union", as French and British leaders met ahead of a pivotal EU summit.

French President Nicolas Sarkozy and British Prime Minister David Cameron held talks in Paris amid a diplomatic frenzy as EU leaders prepare for next Friday's summit that is set to shape the bloc's future.

In an eagerly awaited speech in the German parliament, Merkel said the stakes could hardly be higher, warning that the future of the euro was "indivisibly linked to the unification of Europe".

Cameron, whose country is not part of the 17-nation eurozone, seemed resigned to the treaty change Paris and Berlin say is vital to solve the crisis, but warned he would use any tinkering to bring power back to London.

"If there is treaty change, then I will make sure that we further protect and enhance Britain's interests," he said after a working lunch with Sarkozy.

Earlier Friday, Merkel set out her vision for solving the eurozone debt crisis that has threatened to tip Europe, and the rest of the world, into a deep recession and has pushed the 17-nation eurozone to the brink of collapse.

Europe, she said, was "on the verge" of creating a "stability union", with greater budgetary discipline and checks, along with automatic punishments for those countries that break the rules.

"Anyone who had said a few months ago that we, at the end of 2011, would be taking very serious and concrete steps toward a European stability union, a European fiscal union, toward introducing (budgetary) intervention in Europe would have been considered crazy," she said.

Markets welcomed the speech, with European stock markets sharply highly and the euro gaining ground. Tensions on European bond markets also eased.

While unemployment in debt-mired Spain hit a 15-year high, traders cheered a sharp drop in US unemployment to 8.6 percent in November, its lowest level since March 2009.

But despite a renewed sense of optimism on financial markets, one analyst warned of the dangers of failure.

"The main players are in overdrive to come up with a comprehensive strategy to address the long-term issues," said Juergen Michels from Citibank.

"Market pressure is growing, and the risk of another half-baked deal would likely be more detrimental for confidence, which would have a negative impact on economic activity."

Merkel said she would be talking to "almost everyone" in the run-up to the summit and held talks with Austrian Chancellor Werner Faymann later Friday.

An EU diplomat told AFP that the Brussels gathering, scheduled to run until next Friday afternoon, could well stretch into the weekend.

"What is absolutely necessary is to have a credible agreement for the EU but also for the markets, so we will not leave as long as we do not have a credible agreement," the diplomat said.

Europe's powerhouse couple, Merkel and Sarkozy, are due to meet in Paris on Monday to lay the ground for the summit and thrash out a common position on EU treaty changes.

"There is no alternative to changing the European treaties or -- this would be the second-best option -- to creating a new treaty within the eurogroup," Merkel said.

She said she was heading to Brussels "with the aim of changing the EU treaty" to push through her goals. "Rules must be respected. Respect for them must be supervised. Their violation must have consequences."

The chancellor added that the "fiscal union" should lead to a new "European debt brake" to stop countries from spending their way to the brink of insolvency.

Many European partners want to see the European Central Bank step in to buy up the bonds of distressed eurozone nations as in Britain or the United States and effectively acting as the lender of last resort.

A front-page story in Friday's Sueddeutsche Zeitung suggested Merkel might be softening her rejection of this role for the ECB in return for stricter fiscal discipline.

"A concrete plan for treaty change, ECB intervention and then eurobonds -- that's the script for the euro endgame and the scenario which the federal government is working towards," wrote the Die Zeit weekly.

But Merkel dismissed this, stressing the ECB's independence and insisting: "The mandate of the ECB is different to that of the United States Fed or of the Bank of England," referring to the Federal Reserve Bank.

She also reiterated that eurobonds, a pooling of the debt of eurozone nations, was not the solution now, saying anyone who believed that to be the case "had not understood the nature of the crisis".

Germany, Europe's top economy, believes that eurobonds and any compromise of ECB independence would lead to inflation, which the central bank was set up to prevent.

Merkel pulled no punches as Europe heads into a week likely to define it for years to come.

"Europe is in its most difficult existential test. As chancellor, I am going to do everything... to ensure that Europe comes stronger out of this test than when it went in," she told MPs.

"Despite all the turbulence we have seen in recent times, the euro has proved itself. It is stable... the euro is much more than just a currency."

© 2011 AFP

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