EU: The “Merkozy” Reforms

German Chancellor Angela Merkal and French President Nicolas Sarkozy, a dynamic duo commonly referred to as “Merkozy”, have agreed on a series of reforms to address the debt crisis and have proposed the creation of a new European treaty to go into effect by the end of March.

The Dynamic Duo, Merkozy

The statement from the leaders of the largest contributing markets in the EU came after the held crisis talks in Paris.  For the first time since “crisis talks” became the form for any meeting involving EU leaders, the talks have yielded a plan that has offered a glimmer of hope.  The plan combines elements of intergovernmentalism to appease many of the internal dissenters known as Euroskeptics in Germany and Northern Europe, as well as involving supranational elements to appease Sarkozy and his winning coalition due to the immediacy of French elections.  The announcement, coupled with the austerity measured unveiled in Rome over the weekend, led to Italy’s long-term borrowing rate falling below 6% on Monday, the lowest it has been since October.  The events have illustrated a series of good fortunes for the EU, hopefully foreshadowing momentum for reform and achievement for the single market entity.  The proposition for a new European treaty will be presented to Herman Van Rompuy, the President of the European Council, on Wednesday, ahead of a critical summit of all 27 EU leaders in Brussels on Thursday and Friday.  Evidently, the Merkozy duet has illustrated the progress possible through cooperation and integration; thus making evident the success of the Flexibility Principle, allowing any EU member nation to seek further integration with another, as well as the strength of perseverance of the two parents of the EU, France and Germany.

“We want to make sure that the imbalances which led to the situation in the Eurozone today cannot happen again.  Therefore, we want a new treaty, to make clear the peoples of Europe, members of Europe and members of the Eurozone, that things cannot continue as they are.” – Nicolas Sarkozy, French President

The new regulation being proposed by Merkozy is, in reality, a stability union.  At the heart of the treaty will be rigid rules to enforce the Euro’s original deficit and debt limits, initially set at 3% deficit and 60% debt under the Stability and Growth Pact.  For the Euro member nations that do not adhere to the new regulations for budget cuts, they will be persecuted by the European Court of Justice, punishments allowed under the Infringement Procedure.  The rigid guidelines and direct threat of fiscal punishment, as well as a loss of sovereignty  demonstrated the Germanic influence eminent in the proposal.  Merkel’s fiscal union is one-sided and legalistic, reassuring her Parliamentarian supporters that the EU would not gain more powers to intervene in the tax and expenditure decisions of countries which have secured their fiscal structure.  Nevertheless,  Sarkozy’s ideas of supranational supervision, fulfilling the requirement for a fiscal union, is also depicted through new sanctions and enforcement powers by the EU on any country whose borrowing has exceeded agreed limits.   So saying, countries like Greece, Italy, Portugal, Spain and Ireland which have already asked for bailout packages will lose a great deal of fiscal sovereignty.

“This package shows that we are absolutely determined to keep the Euro a stable currency and as an important contributor to European stability” – Angela Merkel, German Chancellor

Furthermore, the details of the plan consists of a series of 5 reforms aimed at restructuring the flexibility of the fiscal union, as well as an intensification of enforcement mechanisms and restrictions to ensure that deficits such as those in Greece will not be permitted or go unnoticed.  First and foremost, Merkozy propose automatic sanctions for any country which runs up a deficit of more than 3% of GDP.  This is to be followed by the implementation of what Merkozy refers to as a “Golden Rule” built into every Eurozone member’s constitution.  Thus, Eurozone members would have a constitutional obligation to balance their accounts, as a the rule forbids countries from persistently running a deficit.  Despite such escalated restrictions, these were previously included in the Stability and Growth Pact (SGP). Applied in 1997, the SGP limited deficit to 3% of GDP, but more concerning is that the SGP became more flexible and inconsequential after a series of reforms in 2005 and 2007 because of the inability of France and Germany to meet those set regulations.  Moreover, the SGP also limited debt to 60% of GDP but the Commission warned in 2008 that the average public debt in the Eurozone would reach 85% of GDP by 2010.  With the stark reality of Greece’s debt at 116% and Italy not far behind, the failure of the past haunts the future reforms as well.  Nonetheless, not be intimidated, Merkozy plan to give the European Court of Justice powers to supervise and punish any infringement.  The ECJ will verify that countries do not run a deficit and if so, new sanctions and intervention by the entity will affect only those countries and mark a loss of fiscal sovereignty.

“In this extremely worrying period and serious crisis, France believes that the alliance and understanding with Germany are of strategic importance.  Risking a disagreement would be risking the Eurozone exploding.” – Nicolas Sarkozy, French President

Moreover, the most critical sign of structural weakness and insecurity in the prolonged crisis were the losses sustained by private investors after being told to invest in Greece, despite EU reassurances by the EU for equal return.  The dependency on private investors ed to the volatility of the markets, depicting the EU in a series of chronic debt sales and credit downgrades.  So saying, the Merkozy proposal states that private investors will never again be asked to take losses, as in Greece 50% “hair cut”.  The proposal also calls for the European Stability Mechanism (ESM) of 500 billion Euros to replace the current bailout mechanism, the European Financial Stability Facility, in 2012; rather than the previously agreed upon 2013.  These changes to the ESM would usually require unanimity voting, but Merkozy instead has called for qualified majority voting of 85%. Lastly, the proposal also calls for the Eurozone leaders to meet every month, as long as the crisis continues, to discuss growth.

“We want to have an equal Europe, a Europe on the same footing and playing field.  And we do not want to make mistakes of history where perhaps too many decisions were taken without really taking the consequences into account.” – Nicolas Sarkozy, French President

Despite calls for the creation of a harmonizing debt bond under the idea of Eurobonds, the Merkozy duo have already agreed to dismiss the notion.  The controversial subject has already been ruled out by the European Central Bank (ECB), demonstrating a common idea that Eurobonds are in no case a solution to the crisis.  The creation of the common bond would undermine the significance of the calls for reform, debt restriction and fiscal supervision; as well as demeaning the efforts by France and Germany to cooperate at such great lengths.  Furthermore, the bonds would also be a reminder of the inability of Europa countries to make the effort and struggle to reduce their borrowing and reign in their prolonged crisis.  Similar to the buying of debt by the ECB, the bonds would represent a weakening policy that would only grant a short period of time to the member nations, a slight respite that would only perpetuate the inevitable resurgence of the crisis.

In retrospect, the glimmer of hope delivered by the Merkozy proposal may be short-lived considering the veto powers of the Council members, as well as the comprehensive reluctance to reopen the Lisbon treaty to reform, as desired by Merkel.  Nonetheless, the aggressive dedication and stubborn persistence of the Merkozy duo has allowed the EU to live as long as it had; therefore, such hope may serve as a bolster to EU supporters and defenders, allowing the EU to strive through its crisis and emerge as a stronger knit of interconnected countries bound together by past sacrifices and common ideals.

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