Germany, France Come Up With Plan To Handle Europe’s Debt Crisis

Angela Merkel Nicolas Sarkozy

Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France have stuck an agreement that preserves budget discipline, which they anticipate will help get a handle on the Euro debt crisis. The two country leaders will present the plan to EU leaders.

The German-France proposals eliminate placing reparations on private investors in any forthcoming bailouts and additional automatic consequences for governments that are unable to maintain control over their country’s deficit.

Recently, European Central Bank President Mario Draghi demanded a tough budget discipline regime, which could clear the path for the bank to take forceful action and reduce the burden on the euro zone sovereign debt.

Both leaders have said they yearned to win agreement on their suggestions from the 27 EU states during the summit in Brussels but were okay with the idea of going with a smaller group. Sarkozy said he hoped a settlement with all 27 would happen; but that, if only 17 would do it, it would be left open to other countries willing to join later on.

Germany shifted its policy of not requesting private investors to handle some losses in prospective bailouts. Country leaders previously insisted on including passages for possible burden-sharing on all distributed bonds from mid-2013.

Sarkozy said Greek bondholders’ write-down was an unusual case and would not occur again. He said he wanted to show global investors that Europe pays back its debt, decreases its deficits and restores growth.

Investors fear that other deeply obligated countries could have serious sanctions imposed if there’s sharp rise in bond yields. Dr. Merkel said it’s critical to show investors that Europe is still worth investing in without any fear. Merkel said they rejected the jointly-issued Eurobonds idea, which was Berlin’s view.

Sarkozy said both sides agreed Eurobonds is not the answer to the problem. The revised agreement authorizes additional automatic sanctions against the states that are in violation of the present deficit limit over three percent the gross domestic product, lest a majority of the states vote against the sanction. This would reverse the system already in place, which is that most states have to vote to begin disciplinary procedures.

The agreement would also protect the balancing the budget principle in national constitutions throughout the euzo zone; however, no detail on the suggested wording was given.

The European Court of Justice would be able to rule on whether or not the principles the euro zone ​states accepted could be adapted to the new treaty. However, the court would not be able to reject the national budgets, Sarkozy said.

According to the Franco-German proposal, the European Stability Mechanism, will be in place come 2012 and replaces the present-day European Financial Stabilization Fund. Bailout decisions will be taken by a competent majority instead of unanimity, restricting the abilities of a small state to keep a rescue from happening.

The plan predicts governments and heads of state will hold monthly meetings during the crisis.

Article by Loans Ireland.

Image copyright (cc) MICHAEL KAPPELER/AFP/Getty Images

Economy