Merkel, Sarkozy want new treaty to rescue euro

By Sarah Dilorenzo

Associated Press

Published: Monday, Dec. 5 2011 10:50 a.m. MST

French President Nicolas Sarkozy, left, smiles as he greets German Chancellor Angela Merkel prior to their meeting at the Elysee Palace in Paris, Monday Dec. 5, 2011. The leaders of Germany and France will try to agree Monday on a cohesive plan to help save the euro through stricter oversight of government budgets. Financial markets signaled optimism that French President Nicolas Sarkozy and German Chancellor Angela Merkel will unveil a unified plan that tightens political and economic cooperation among the 17 European Union countries that use the euro and sets the stage for more aggressive aid from the European Central Bank.

Remy de la Mauviniere, Associated Press

Enlarge photo»

PARIS — Seeking to restore confidence in the euro, the leaders of France and Germany called for changes to the European Union treaty so that countries using the euro would face automatic penalities if budget deficits ran too high.

Stock prices rose and borrowing costs for European governments dropped sharply. Investors viewed the Franco-German proposal — which will be debated at a European Union summit Friday — as an important first step in an emerging plan to save the euro.

Implementing treaty changes could take months, but a commitment to tighter coordination could open the way for further emergency aid from the European Central Bank, the International Monetary Fund or some combination.

"Our wish is to go on a forced march toward re-establishing confidence in the eurozone," French President Nicolas Sarkozy said at a press conference alongside German Chancellor Angela Merkel. "We don't have time. We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders."

Investors have been hopeful that the pair will get what they want at a summit in Brussels on Friday, where failure could doom the euro.

Additional emergency funding from the ECB or elsewhere is necessary, economists said, to address the underlying problem of mountains of government debt in Europe, leaving markets still waiting for a permanent fix.

"The onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis," said Jennifer McKeown, senior European economist at Capital Economics. "Perhaps if other member states sign up to Merkel and Sarkozy's proposals this week the (ECB) will step in."

Sarkozy pledged to have a new EU treaty ready for signing by March. It would then need to be ratified in each country, which could mean lengthy parliamentary debates or national referendums in some cases.

"A lot depends on the specifics and how these are going to be framed by lawyers," said Piotr Maciej Kaczynski, an expert on EU constitutional issues at the Center for European Policy Studies in Brussels.

At the very least, it could take at least 18 months to ratify a new treaty once it has been signed by all heads of state, said Kaczynski. "That is a much longer timeline than what markets might want," he said.

Countries like Italy and Spain need help now to lower their bond yields, an interest rate that reflects the cost of their borrowing and how creditworthy they are deemed to be by investors.

Sarkozy said he and Merkel would prefer that the treaty be agreed by all 27 members of the European Union. But he left the door open to one that covers only the 17 euro countries and anyone else "who wants to join us."

Sarkozy and Merkel discussed several specific proposals, some of which could be enshrined in a new treaty. They included:

— automatic punishment for any government that allows its deficit to exceed 3 percent of GDP. Governments are supposed to follow this rule already, but many, including France, have flouted it;

— requiring countries to enshrine in law a promise to balance their budgets;

— never again asking private investors to take losses, as a bailout of Greece did;

— making Europe's bailout fund permanent by the end of next year, rather than mid-2013;

— and holding monthly European summits until the crisis is over.

Sarkozy said more details would be included in a letter sent Wednesday to European Council President Herman Van Rompuy.

After Sarkozy and Merkel spoke, stocks rose and borrowing rates for governments across Europe plunged, indicating a sharp rise in investor confidence in the continent's ability to resolve the crisis.

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