The leaders of Germany and France met yesterday under intense pressure to agree a plan for imposing budget discipline across the eurozone, as markets rallied in the hope they can produce a sweeping solution to the debt crisis at last.
Markets want French President Nicolas Sarkozy and German Chancellor Angela Merkel to forge a comprehensive proposal in Paris for restoring faith in eurozone nations’ ability to repay their debts, before an EU summit later this week.
However, despite their single nickname of “Merkozy,” the Franco-German duo has yet to produce a single master plan for halting a slide that is threatening the currency union’s survival.
“There are still significant differences between Sarkozy and Merkel, so we’re in for a volatile week, and the risk is that any kind of disappointment could trigger a pull-back,” Kepler Capital Marketstrader Patrice Perois said.
Merkel and Sarkozy both want a system of more coercive discipline for eurozone governments that fail to keep their budgets under -control. Such a system, which they want all 27 EU leaders to approve at Friday’s summit, would likely need a change to the EU treaty.
The sticking point is that France opposes Germany’s push to have eurozone states surrender control of their budgets to a European authority with veto power, with the European Court of Justice possibly punishing governments that step out of line.
While Germany, fed up with costly bailouts, wants a more federal EU system, Sarkozy is under fire five months before a presidential election from political rivals who accuse him of being ready to hand over sovereignty to unelected EU officials.
An aide to French Socialist Party presidential candidate Francois Hollande said that acquiescing to Berlin’s demands would show the Franco-German relationship had become unbalanced.
“We do not need a treaty to have budgetary union,” aide Pierre Moscovici said.
“Most of all, it erodes our sovereignty. We do not need to be under the nitpicking control of the European Court of Justice,” he told French LCI television.
The governments of Italy, Ireland and Greece will all put national austerity budget plans to their parliaments this week.
In Rome, new Italian Prime Minister Mario Monti was to take a 30 billion euro (US$40.37 billion) “Save Italy” austerity package to parliament yesterday, buoyed by a positive market reaction.
“Without this package, we think that Italy would have collapsed, that Italy would go into a situation similar to that of Greece,” Monti told the news conference.
Italy’s technocrat Cabinet approved the mix of tax rises, pension reforms and incentives to boost growth in a three-hour meeting on Sunday, opening one of the most crucial weeks since the launch of the euro more than a decade ago.
Markets reacted enthusiastically, with the yield on Italian two-year bonds plunging 85 basis points to 5.78 percent. This was far below the yields of more than 7 percent last month — levels at which Greece, Ireland and Portugal had to take international bailouts.