Eurozone: France and Germany call for tougher treaty

French President Nicolas Sarkozy: "What has happened (in the eurozone) must never happen again"

The leaders of France and Germany say the EU needs a new treaty to deal with the eurozone debt crisis.

The statement from French President Nicolas Sarkozy and German Chancellor Angela Merkel came after they held crisis talks in Paris.

Eurozone states should face greater checks on their budgets and sanctions if they run up deficits, they said.

Mr Sarkozy said talks on a new treaty should be completed by March, to ensure such a crisis never happened again.

The Paris talks come ahead of an EU summit on Friday that is being seen as crucial for the future of the single currency.

Analysis

If these measures are approved the eurozone will have taken a giant stride to becoming both a monetary and fiscal union.

Some sovereignty over tax and spending will have passed to Brussels, but how much will only become apparent in the weeks ahead.

Both Chancellor Merkel and President Sarkozy have made concessions - the Germans have accepted that the European Court of Justice will not be able to veto budgets, but President Sarkozy has had to accept automatic sanctions for those who break the rules.

As for Britain, the PM will face a tough decision over whether he tries to win back powers from Europe in exchange for British support for treaty change.

The biggest doubt that hangs over all of this is firstly time - the negotiations will go on for months. And then there is the underlying reality - none of these measures explains how the huge debt mountains will be brought time at a time of almost zero growth.

The announcement, and austerity measures unveiled in Rome over the weekend, led to Italy's long-term borrowing rate - how much it has to pay to borrow money - falling below 6% on Monday afternoon, the lowest it has been since October.

But later on Monday, ratings agency Standard and Poor's announced it was putting 15 eurozone countries - including France and Germany - on "credit watch" due to ongoing fears over the impact of the debt crisis.

The only two countries not put on credit watch were Cyprus, which is already under review and Greece whose rating has already been severely downgraded.

Mr Sarkozy and Mrs Merkel released a statement saying they noted the warning but that their new proposals were aimed at strengthening co-ordination and so boosting stability and growth.

Budget oversight

At their joint press conference on Monday afternoon, Mr Sarkozy said things in Europe "cannot continue as they are" and that the Franco-German wish was for "a forced march toward re-establishing confidence in the eurozone".

"We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders," he said.

Mrs Merkel said France and Germany were "absolutely determined" to maintain a stable euro and wanted to see "structural changes which go beyond agreements".

The two leaders said the treaty changes would ideally be implemented by all 27 EU member states, but that if that was not possible, just the 17 states which have adopted the euro.

Discussions on the changes should be concluded by March "because we must move quickly", said Mr Sarkozy.

The proposals include provision for automatic sanctions against any eurozone country which runs a deficit of more than 3% of GDP.

Franco-Germany proposals

  • Automatic sanctions for any country which runs up a deficit of more than 3% of GDP
  • "Golden rule" built into eurozone member's budgets against running a deficit
  • Private investors never again to be asked to take losses, as in Greece
  • European Stability Mechanism (ESF) brought forward from 2013 to 2012, with decisions based on a qualified majority not unanimity
  • Eurozone leaders to meet every month as long as crisis continues to discuss growth

These could only be overturned if a qualified majority of states voted against them. Under current rules, a majority of states must vote in favour of sanctions for them to be imposed.

Eurozone states would also be obliged to include a "golden rule" in their budgets prohibiting persistently running a deficit, with the European Court of Justice verifying they had done so.

Addressing concerns about countries' sovereignty over their own budgets, Mrs Merkel said the court would only assess whether a budget showed "a real undertaking to return to a balanced budget" but would not be able to invalidate it.

'Equal Europe'

The leaders also called for the European Stability Mechanism (ESM) - the 500bn-euro (£430bn: $673bn) bailout fund due to replace the European Financial Stability Mechanism (EFSM) in 2013 - to be brought forward to 2012.

Decisions on changes to the ESM should also no longer require a unanimous vote, they said, but only a qualified majority of about 85%.

They also rejected the idea of introducing single currency "eurobonds" - already ruled out by the European Central Bank - to help ease the debt crisis, with Mr Sarkozy saying they were "in no case a solution".

Five crucial days for the euro

  • Monday: Nicolas Sarkozy and Angela Merkel propose tighter eurozone controls
  • Italian PM Mario Monti seeks parliamentary approval for his austerity package
  • Ireland's government unveils details of its proposed austerity budget
  • Tuesday: US Treasury Secretary Timothy Geithner arrives in Germany before travelling to France and Italy for talks with euro leaders
  • Wednesday: The talking continues as many EU leaders gather in Marseille for a European People's Party congress
  • Thursday: ECB's monthly policy meeting could produce new measures
  • Thursday and Friday: Crucial EU summit in Brussels to consider Sarkozy-Merkel plan

Also ruled out was the idea of private investors being required to accept losses on eurozone bonds in the future, as happened with the Greek bailout.

Mr Sarkozy and Mrs Merkel said they wanted the heads of eurozone countries to meet for a summit every month as long as the crisis lasted, with the focus on promoting growth.

"We want to have an equal Europe, a Europe on the same footing and playing field," said Mr Sarkozy.

"And we do not want to make the mistakes of history where perhaps too many decisions were taken without really taking the consequences into account."

The two leaders will present their proposals to European Council president Herman van Rompuy on Wednesday ahead of a leaders' summit in Brussels on Friday.

The BBC's Europe editor Gavin Hewitt says the plan is aimed at delivering one message - that the eurozone will never again allow member states to overspend and run up large deficits.

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

Introducing changes to the hard-fought European treaty could take many months, but analysts say that a strong, unified expression of intent on Friday could reassure markets enough to lower borrowing costs for Italy, Spain and other countries with high debt and spluttering economies.

Mr Sarkozy faces an election early next year and is under domestic pressure not to cede sovereignty to unelected officials in Brussels.

If governments cannot pay their debts - if they default - the resulting shock could bring down the banks that lend to them and create another global economic crash.

In another development on Monday, the International Monetary Fund (IMF) approved the release of 2.2bn euros ($3.96bn; £1.8bn) for Greece - part of a three-year IMF-EU bailout package - after completing a review of Greece's economic performance.

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