Solution options for next week's summit
European leaders are racing to strike agreement within days on a new deal to toughen the enforcement of EU budget rules. By adopting highly intrusive measures to oversee each other’s finances, they hope to persuade a reluctant European Central Bank to intensify its response to the crisis.
The fate of the euro may well rest on a big new intervention by the ECB, but the issues are as contentious as they are complex. Simply put, however, the overbearing pressure on Italy and Spain is such that the single currency might break up if the leaders cannot settle on a new grand bargain to save it. As momentum builds in advance of an all-important EU summit next week, a hectic round of political talks is in prospect. The aim is to bind everyone into the same plan by the time the leaders leave Brussels next Friday night. For that to happen, the four conditions, below, must be met.
Merkel/Sarkozy agreement
NOTHING HAPPENS in the euro zone without the German and French leaders agreeing to it first.
Angela Merkel has already secured Nicolas Sarkozy’s support for her drive to change the EU treaties, but Berlin and Paris remain far apart on core elements of the reform initiative.
Merkel’s plan for a new “fiscal union” would see new powers for the European Commission and the European Court of Justice to enforce ever-stricter budget rules. By contrast, Sarkozy favours a scheme operating outside the ambit of EU law as a purely “intergovernmental arrangement” with government given the ultimate power to accept or reject each other’s budgets.
Ireland is wary of the treaty change initiative. However Berlin’s preference to give a prime role to EU institutions, albeit on German terms, would be in Ireland’s interest as the institutions typically act as a bulwark for smaller countries against the big powers.
If Merkel does not get her way, however, she has indicated a willingness to go the intergovernmental route. Critics of intergovernmental systems argue that such an arrangement would blunt the effort to secure budget discipline as governments would be unlikely to criticise each other.
Merkel and Sarkozy have clashed over the role of the ECB, with the French leader preferring a wider mandate. However, Merkel now appears ready to accept a new intervention by the bank.
There other divisions. Sarkozy says euro zone defaults should stop with Greece, but Merkel still insists on private sector involvement as a condition for aid under the new permanent bailout fund, which is due to start operations in 2013. The two meet in Paris on Monday in an attempt to settle differences.
Other EU leaders
Everyone else falls in behind the new plan. Agreement between Germany and France is a necessary but insufficient condition for a wider pact. Bringing everyone else on board is difficult, not least because 25 other countries are involved but also because their interests vary widely.
EU leaders will have to settle new strains between the 17 euro countries – the “ins”, as they are known – and the 10 countries that don’t use the currency, now known as the “outs”. The outs fear they will be left behind in a two-speed Europe if Germany and France lead the euro countries into a tightly integrated currency club with deeply entrenched policy co-ordination.
A further concern for the likes of Ireland is that a club within a club emerges, with closer co-operation among prosperous “core” euro zone countries and “peripheral” countries left out in the cold.
Crucial here is a European Commission plan to strengthen the operation of the euro zone. Advocates say the commission’s plan is the best way to avoid fragmentation.
However, the initiative goes against the grain of Nicolas Sarkozy’s plan and the commission’s insistence that treaty change is not required and that euro bonds provide grounds for stability is at odds with Angela Merkel. Most observers say she will get her way, eventually.
What’s more, the commission’s plan embraces a high degree of policy surveillance, which is likely to cause discomfort to many of Europe’s governments.
It falls to European Council president Herman Van Rompuy to bring the leaders together. The phone lines into his office will be busy next week.
Italy, Spain and Greece
ITALIAN PRIME minister Mario Monti presents a new budget on Monday and the Greek parliament votes on the country’s 2012 budget on Wednesday.
Both initiatives are crucial as the countries have struggled to gain Europe’s confidence.
Equally important are the budget plans of incoming Spanish prime minister Mariano Rajoy. He has been coy to date but may set out his thinking at a meeting in Marseilles of centre-right leaders on Wednesday and Thursday.
ECB's response
THE EUROPEAN Central Bank’s governing council meets on Thursday in Frankfurt, hours before political leaders gather for dinner in Brussels.
Its president, Mario Draghi, has opened the door to a new intervention but says the politicians must act first to introduce a “fiscal compact” to enforce the rules. Assuming a binding agreement is reached, the bank is expected to step up its response. It may do this by increasing its purchases of sovereign bonds on the open market or by providing loans to the International Monetary Fund to enable it to step up its involvement, or by doing both.
