Merkel, Sarkozy to Europe: shelve your sovereignty, save the euro

The plan put forth from the German and French leaders to save the euro amounts to a call for European states to give up full control over their own spending.

By , Staff writer

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    French President Nicolas Sarkozy smiles as he greets German Chancellor Angela Merkel prior to their meeting at the Elysee Palace in Paris, on Dec. 5.

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An end to sovereign control over European budgets. That was the big idea that Germany's Angela Merkel and France's Nicolas Sarkozy outlined in a letter to European Council President Herman Van Rompuy Wednesday. 

The call for bracing, immediate change should lead to a fascinating day today, when European leaders gather in Brussels to discuss ways out of the euro crisis.

The Daily Telegraph is also reporting that Mr. Van Rompuy has written a paper to be discussed tomorrow on fiscal union, which calls for a "higher degree of surveillance and discipline in the conduct of national policies.”

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The meat of the proposal

A lot of the language around this issue has been indirect – not least among the European politicians who favor giving Brussels control over the budgets of member states like Italy and Spain, whose struggles with sovereign debt and slow growth have terrified investors and economists about the potential for a cascade of European defaults.

Reuters said these European politicians are calling "to toughen up fiscal governance via treaty changes." But the proposal amounts to offering Europe a choice: Give up domestic political control over how much you spend on social welfare and defense (for instance) or risk the demise of the euro.

The fact that the eurozone would have a single monetary policy and 11 different fiscal policies was the elephant in the room when the currency was created in 1998 (the eurozone has since grown to 17 states.) Critics pointed out that this was a recipe for potential disaster, with countries able to borrow at lower rates than their ability to repay would indicate. Proponents argued that rules governing how much debt as a percentage of GDP members could take on would mitigate any risks. But most national politicians simply flouted the rules, attendant to their voters' demands that money be spent and aware that the European Central Bank had no power to compel compliance – or remove them from office.

Merkel and Sarkozy want to address this structural flaw. "The current crisis has uncovered the deficiencies in the construction of [European Monetary Union] mercilessly. We need to remedy those deficiencies," they wrote.

But the reason this wasn't dealt with in the original treaty – public unease at giving up national control to a supranational body likely to be dominated by the continent's biggest economies – is as true today as it was then.

To be sure, people have gotten used to the euro and panic about the economic situation is rife. Greece and Italy now have appointed technocratic prime ministers who are largely doing Brussels' bidding on financial matters, and no pitchforks or burning hayricks have been spotted (though major unions in both countries are threatening national strikes over austerity measures). 

The chance for change

So it's possible that treaty changes will be able to go through in this environment – though it's hard to see that happening without an extended period of debate, revision and in many cases public referendums. Individual states are still, well, states, with different political cultures and different interests. Some politicians in the UK, not a member of the eurozone but part of the 27 member European Union, have already signaled unease over treaty changes that could effect the EU as a whole and said they'll insist on a public referendum.

This all signals a drawn-out process. But the letter Merkel and Sarkozy (being called "Merkozy" now by many wags in the financial press) released today says "steps need to be taken now without further delay." Investors signaled they weren't anticipating fast action today, with Europe's major stock indices edging lower.

"We need more binding and more ambitious rules and commitments for the Euro area Member States. They should reflect that sharing a single currency means sharing responsibility for the Euro area as a whole," they continue. "The main building blocks of the new Stability and Growth Union are: A strengthened institutional architecture. Euro area governance needs to be substantially reinforced."

They go on to suggest that fiscal discipline should be maintained by "enforcement," a role for the European Court of Justice in "verification" that legislation on balanced budgets and other matters have passed, and rules that would lead to "automatic consequences" if a eurozone member's deficit grows to more than 3 percent of GDP. They're also calling for greater integration of national tax, labor, and financial market policies.

Where does Europe go from here?

We'll certainly know a lot more after tomorrow. A shrinking of the eurozone in the coming year remains a possibility. Valery Giscard d'Estaing signaled that in an interview with Reuters today. The former French president, who championed Greece's entry to the eurozone in 2000 said: "Greece could stay in the eurozone but it is very difficult to achieve economic recovery with a strong currency.... Is it better to use a national currency for a period, or have the safety of a strong currency? It is Greece's choice."

What he's talking about is the ability of a nation that controls it's own currency to try to inflate its way out of a crisis like this by printing money, something that makes exports and tourism more competitive and amounts to a haircut on existing debt. Greece's international creditors wouldn't like that at all. But the country's citizens are none too happy with the current situation. 

As for reworking existing treaties? Mr. Giscard, the great proponent of European integration, thinks that's a bad idea: "Reforming treaties that have to be modified by unanimous vote is impossible. Choosing the path of treaty revision with 27 (EU members) would make the crisis last and would give the impression that it is intractable."

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