Franco-German push for closer eurozone ties

By Quentin Peel in Berlin and Peggy Hollinger in Paris

Published: February 2 2011 23:01 | Last updated: February 3 2011 10:49

Annual summits of the 17 eurozone leaders will be proposed by Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, as part of a comprehensive plan to reinforce economic co-operation in the common currency area, a senior German government official has said.

The idea would reinforce a growing divide between the “hard core” inner currency area of the European Union, and the full 27-strong EU membership, including countries such as the UK, Sweden and Denmark, that have opted to remain outside.

Ms Merkel and Mr Sarkozy will jointly present ideas on restoring credibility to the eurozone at the European Union summit on Friday.

The two leaders want to establish much closer co-ordination of national economic policies in the 17-member common currency area, aimed at boosting growth and competitiveness, and avoiding big economic imbalances between them.

In a nod towards Germany’s push for greater fiscal discipline, the French government said on Wednesday it would introduce legislation to parliament within weeks that would incorporate a balanced budget rule into France’s constitution.

The rule would force governments to set a target date for eliminating the cyclically adjusted deficit and make annual progress towards meeting the target.

Berlin wants all eurozone governments to adopt their own “debt brake” rules.

No decisions are expected at the summit on Friday, but a comprehensive package of measures to be approved by the end of March will include actions to bolster and make more effective the €440bn eurozone rescue fund, and a reassessment of the capacity of Greece and Ireland to service their debts, the official said.

The package will also include strengthened measures for surveillance of economic policies, including national debt burdens, by the European Commission, and full details for the permanent European stability mechanism to be established from 2013.

The official, speaking on condition of anonymity, said the plan for closer economic co-operation, dubbed a “pact for competitiveness”, would require the eurozone heads of state and government to agree specific common economic targets, probably at an annual summit. Other EU members would be welcome to join, especially those that were intending to join the common currency zone in the future.

He made it clear that Germany was prepared to consider increasing financial guarantees for the €440bn European financial stability facility to enable the fund to exploit its full lending capacity, but ruled out direct bond buying by the fund. He did not rule out lending to member states to buy back their own bonds, one proposal under discussion to ease Greece’s debt burden.

The Franco-German plan for economic co-operation would involve the European Commission in surveillance, but not the European Parliament, because it would be focused on national rather than European legislation, he said.

“We don’t believe we can wait another 10 years for progress on economic co-operation in the eurozone,” he said, implying it would take that long for agreement among all 27 EU member states. By deciding at heads of government level, eurozone countries would rely on peer pressure, rather than sanctions, to ensure compliance.

The sort of legislation to be co-ordinated would be social security schemes and the mix of taxation between direct and indirect levies, all of which remain under national control. The official dismissed concerns that closer co-ordination among 17 members might create tensions in the 27-member EU internal market.

“Decisions on the internal market would not be taken at 17,” he said. “The EU 27 will continue to do everything for which there are European competences, so I do not see any danger.”