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France, Germany Unveil Joint Strategy On Fiscal Union

by Ulrika Lomas, Tax-News.com, Brussels

07 December 2011


Ahead of a European Union (EU) summit meeting in Brussels, and amid fears of unprecedented mass downgrading of eurozone credit ratings, Germany and France have unveiled details of their joint initiative for fiscal union as a means to overcome the worsening debt crisis.

Following intense negotiations, German Chancellor Angela Merkel and French President Nicolas Sarkozy announced details of their agreement on plans for greater eurozone governance, in which states would relinquish some of their fiscal sovereignty, and involving significant changes to existing EU treaties.

The heads of state of the two countries aim to submit their common proposals to President of the European Council Herman van Rompuy shortly, for discussion at the forthcoming European Council meeting on December 8 and 9.

In accordance with the Franco-German proposals, failure to adhere to deficit rules would result in automatic sanctions, which may only be prevented in the event of a qualified majority of 85%.

In addition, in a bid to achieve budgetary balance, a binding, uniform “golden rule” pertaining to debt limits would be enshrined in the constitution of ideally all 27 EU member states, but at least of all 17 eurozone member states. The European Court of Justice would under the plans be tasked with overseeing that national law provides for mandatory compliance with the debt limit, although would be unable to declare individual national budgets to be invalid.

On the issue of private sector involvement, the two leaders agreed that bank participation in the partial debt write-off for Greece was a one-off. Merkel provided her firm assurances that state bonds are indeed “safe investments”.

Under the plans, adoption of the European Stability Mechanism would be accelerated and achieved by the end of 2012, one year earlier than previously proposed, and eurozone heads of state and government would convene on a monthly basis as an 'economic government', with the aim of strengthening competitiveness and boosting economic growth.

Regarding the role of the European Central Bank (ECB), France and Germany underlined their full confidence in the bank and reaffirmed its independence, while once again ruling out the idea of 'eurobonds' as a solution to the debt crisis.

Commenting on the proposals, the German finance ministry emphasizes in its statement that the joint initiative is designed to send out a clear signal to investors all around the world that Europe is committed to the debt rule, to paying its debt and to boosting growth.

A great deal is at stake as EU leaders prepare to meet. Negotiations on the proposed treaty changes are to be agreed by March next year.

TAGS: tax | economics | fiscal policy | law | budget | France | Germany | currency | European Union (EU) | Europe

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