Euro debt crisis 101: What can Merkel, Sarkozy plan accomplish?

German Chancellor Merkel and French President Sarkozy are pushing eurozone reforms to mandate greater fiscal discipline in Europe. But is that enough to begin reversing the eurozone crisis?

By , Correspondent

3. What's being done to stop the crisis and prevent future problems?

The current debate about how to stop the crisis centers on two terms – bailouts and eurobonds. Bailouts are financial aid packages, which are currently provided by the IMF and the European Financial Stability Facility (EFSF), a vehicle created specifically to help eurozone members overcome the crisis. Critics argue that bailouts are stopgap solutions and have so far failed to calm financial markets. Indeed, Greece had to be bailed out twice already within the last two years, and there could be need for further aid.

“Still, the EFSF is a much better tool than eurobonds,” Mr. Fichtner insists. “A bailout is a loan which comes with conditions, like austerity measures and fiscal discipline for the future. Eurobonds on the other hand create no incentive to cut spending and decrease debt.

Eurobonds would be issued by the European Central Bank (ECB) and replace government bonds, lowering the interest rates countries like Greece and Portugal have to pay now when buying their bonds back, but raising the rates for strong economies like Germany. In effect, the whole eurozone would guarantee the debts of individual member states – which current EU regulations rule out.

The creation of eurobonds would require a much more integrated fiscal policy in the eurozone, something Merkel and Sarkozy hinted at after their Paris meeting on Tuesday, when they spoke of “true economic governance” needed in Europe. But resistance against such a centralizing move is high, not just in smaller economies fearing to be sidelined, but in Germany, too, notably in Merkel’s own party.

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