EU: Sarkozy-Merkel Meeting

Meeting in Paris, both Chancellor Merkel and President Sarkozy have undertaken the task of conquering the growing Euro crisis. The results of the meeting were less than anticipated and seemingly reminiscent of past promises.  They do, however, represent a large step forward towards a truly unified Euro-zone.

In the meeting, both leaders from the strongest two economies in the Euro-zone advocated for Euro-zone leaders to gather routinely to better coordinate budget and tax policies across the currency bloc.  The creation of such a Euro-zone council would be overseen by a Euro-zone chief being voted in every 2 years, the first would be European Council President Herman Van Rompuy. The meetings will serve as a tool to implement increased pressure on the 27 members to improve fiscal discipline in the bloc. In order to do so, the council has threatened to cut the region’s wayward spender off from key  European Union transfer funds.  The proposal does mark an effort to boost fiscal discipline across the continent by creating an incentive for countries to reign in spending and cut their budget deficits.

“The proposals made today by President Sarkozy and Chancellor Merkel are a welcome step forward in our common efforts to strengthen the governance of the euro area.  They represent an important political contribution by the leaders of the two largest euro area economies to this debate and the on-going work.” – European Commission President, Jose Manuel Barroso, and Commissioner for Economic and Monetary Affairs, Olli Rehn

Combined with the call to enshrine the principle of a debt brake in a national constitutional law, the announcement of an European financial transaction tax, is further evidence of strong political commitment on the long-term to the sustainability.  Germany and France have been strained by the surmounting pressure of the indebtedness of countries such as Greece and Ireland, but their willingness to support the Euro is evident in their mission to reform the ailing system.

Though the reforms have been long in the waiting, the content of these balanced budget principles have been seen before.  In the Stability and Growth Pact from 1997, based on the Treaty Establishing the European Community, proposals were made for fiscal monitoring of EU member by the European Council of Ministers and, after multiple warnings, sanctions were to be imposed against offending members.  The disuse and lack of enforcement of this pact is apparent when the actual criteria that member states must respect are studied:

  • an annual budget deficit no higher than 3% of GDP
  • a national debt lower than 60% of GDP or approaching that value

Coincidentally,Greece is estimated at nearly 130% ratio of debt to GDP, Italy nearly reaching 120% and with the average of all 27 member around 74%, the Stability and Growth Pact disintegrates into dust.  Clearly, the enforcement of that pact was ineffective,making the current critics skeptical of the same ideas being proposed once again.

In conjunction, further problems arise in the authority needed to impose such proposals and under what organization would that responsibility would fall to.  This is a considerable barrier to progress as the EU members have long fought to remain hold on their national sovereignty and power over any reforms to their structures.  Furthermore, the tax proposals on transaction also encounter problems because both the German and Irish banks have stated that such an idea would be ineffective.  Also, such a tax would only function if imposed across the board, otherwise trading would flee to tax-free markets, but the European Central Bank and Britain both oppose the tax proposals. So saying, Austria and Italy are so far the only nation voicing support for the implementation such taxes.  Sadly, the criticism continues persist on the home front of French President Sarkozy, the media headliner for the meeting. With elections approaching, Sarkozy’s main rival,Francois Hollande, did not hesitate in the least to issue a condemning statement that the decisions were a “huge step back” and that the President had “surrendered” to Germany’s position on Eurobonds.

Nevertheless, Eurobonds are still rumored to be the “savior” of the current crisis.  Despite the tumbling stock markets at Merkel’s reluctance to tackle the bond issues, Merkel has stood by her statement that the Eurobonds are not a viable option at the current stage of the crisis and should not serve as the initial step to tackle the situation.  Vying with Merkel, the Eurobonds stand as an agreement by the 17 euro-zone members to guarantee a communal debt between them all; therefore, the Eurobonds should serve as a cumulative end to negotiations in which the guarantee will help create a preemptive measure to combat a reoccurring crisis.  Currently, the desperation of the highly indebted nations make it difficult for the successful implementation of such a concept.

“The more we move towards integration of economic policy, the closer we get to the idea of Eurobonds” – Jose Blanco, spokesperson for ruling party PSOE

Despite criticisms from a broad range of nations internationally, the steps taken will help segment negotiations towards a financial union, a true union, of the Euro-zone that will allow a cohesive action to successfully tackle the surmounting issues. Once tackled, this union will be viable to the communal debt, being promised in the Eurobonds, and under such a concept,the nations will be able to guarantee the financial security of one another because of their mutual investments through the Eurobonds.


3 responses to “EU: Sarkozy-Merkel Meeting

  1. Pingback: Stock Market: Global Markets Falling and the Future | Year of 1989

  2. Pingback: EU: Three Levels of Failure | Year of 1989

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