Share Merkel, Sarkozy Agree on Fiscal Consolidation for Europe with your friends.


E-mail It

Social Web

December 05, 2011

Merkel, Sarkozy Agree on Fiscal Consolidation for Europe

Posted in: Uncategorized

France and Germany have reached agreement on a fiscal plan for Europe that has everything to do with veto power for the European Commission over sovereign budgets and very little to do with the long-term problem of smoothing growth over 17 different countries operating under one monetary union.

The leaders of France and Germany agreed Monday on a new fiscal pact that they say will prevent another debt crisis.

After meeting in Paris, French President Nicolas Sarkozy outlined the basic elements of the fiscal pact, which he said will be presented in detail at a meeting of the European Commission later this week.

In what is seen as a concession by Sarkozy, the pact includes automatic sanctions for member states that violate an existing rule to keep budget deficits under 3% of gross domestic product. France had argued that making sanctions automatic would infringe on national sovereignty.

Sarkozy and German Chancellor Angela Merkel said they would like all 27 members of the European Union to adopt the pact, which would require amending or rewriting existing EU treaties.

The United Kingdom, a European Union member but not a member of the eurozone, has already said that they have no interest in a treaty upgrade that would trigger a referendum. But inside this same statement, Merkel and Sarkozy (or Merkozy, if you prefer) said that just the 17 member states of the eurozone would need to agree. I’d expect an extreme amount of pressure put on the peripheral countries to go along with this.

This would basically run the fiscal positions of 17 eurozone countries out of Brussels, with sanctions for noncompliance and a de facto balanced budget amendment embedded in national constitutions. This is a prescription for the Eurozone to remain economically stagnant permanently, or at least completely unable to deal with crises.

This is mainly being done to reassure investors, not out of any demand for fiscal austerity that arises naturally out of the economic needs for the countries involved. “The shock doctrine” was a phrase built for moments like this. Spain and Italy were forced into trouble by the bond market, and as a condition for an ECB bailout, they have to basically stop deciding their budgets on their own, and give in to a banker-influenced process to starve their own safety nets and crunch their economies.

The fact that this is an EU treaty means that the ultimate decision on the rules will take an extended period of time and at least some referenda in the affected countries. We have a lot of choppy waters before this gets approved. And even after it does, what will the economy in these countries look like?

Return to: Merkel, Sarkozy Agree on Fiscal Consolidation for Europe