France and Germany want treaty changes to solve euro crisis

By Alvise Armellini and Clare Byrne Nov 24, 2011, 15:42 GMT

Strasbourg, France - A summit of the eurozone's three largest economies Thursday produced an announcement by France and Germany that they will soon propose changes in European Union treaties to instill greater budget discipline in the currency bloc.

The two-year crisis has recently expanded from the periphery of the euro area to engulf Italy, and is also threatening France's top-notch triple-A credit rating. On Wednesday even Germany was affected, as its 10-year bond auction ended partially unsold, a move seen by some as a sign of danger.

'We are all three perfectly aware of the seriousness of the situation,' French President Nicolas Sarkozy said after hosting a meeting in Strasbourg with German Chancellor Angela Merkel and Italy's new technocratic premier Mario Monti.

'In the coming days, France and Germany will make concrete, common proposals to amend the treaty to improve eurozone governance and to have greater convergence in economic policies,' Sarkozy said, calling on Italy to support the initiative.

Analysts had speculated that, in return for supporting the German-inspired move on EU treaties, Sarkozy would demand that Merkel mollify her opposition to letting the European Central Bank (ECB) play a greater role in putting out the eurozone fire.

The Frankfurt-based institution has been helping by buying the bonds of troubled euro states, but some economists suggest it could do more by lending to the eurozone's rescue fund or by acting as a lender of last resort - which would also need an EU treaty change.

But questioned by reporters, Merkel said the treaty amendments she was working on with Sarkozy - which would be discussed with EU partners at a summit in Brussels on December 9 - 'have nothing to do with the work of the ECB.'

Sarkozy said the three leaders agreed to 'abstain from negative or positive demands' towards the ECB. He presented it as a 'positive compromise.'

But he did not hide that there were underlying tensions with Merkel. 'When it comes to institutions like the ECB, we don't have the same history. That's reality, there's no point in denying it.'

Monti said he supported the drive to create 'a fiscal union' in the eurozone, which should pave the way for more automatic sanctions for budget sinners, but also for the joint issuance of sovereign bonds, an idea which Merkel continued to oppose.

'Nothing has changed compared to what I said yesterday,' Merkel said, referring to her German parliament speech where she deemed it 'extremely worrying and inappropriate' to launch a debate on so-called eurobonds while the debt crisis was still raging.

Germany, with the sometime reluctant support of France, has been the strongest advocate of eurozone budget discipline, and has resisted any moves to reduce the incentives for weaker economies to undertake painful budget adjustments and economic reforms.

But Monti reminded the audience that it was previous French and Germany governments, 'with the complicity' of then EU-presidency-holder Italy, which in 2003 allowed the countries to ignore eurozone debt and deficit guidelines, dealing a deadly blow to the credibility of the currency bloc's fiscal rulekeeping.

'I think it was a big mistake, I think it has been recognized by everyone,' the Italian leader said.

Monti, a former EU commissioner and economist who last week replaced Silvio Berlusconi - whose authority was undermined by political defections, corruption and sex scandals as well as mounting market pressure - also challenged the EU's focus on austerity.

Insisting that the EU-mandated target for Italy to balance its budget by 2013 'is not under discussion,' he mentioned 'a more general problem for the world and certainly the European economy: what happens if we enter a recession or a recession deeper than expected?'

He called for a debate on 'whether, to what extent, and how fiscal policies should be adjusted to take into account changes in the (economic) cycle. It is a well-known issue, it can be an issue for the European Union,' Monti insisted.