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Home » World » Germany, France plan quick new Stability Pact, report says

Germany, France plan quick new Stability Pact, report says

FRANCE and Germany are planning a quick new pact on budget discipline that might persuade the European Central Bank to ramp up its government bond purchases, Reuters reported citing a Welt am Sonntag report on Sunday.

Echoing a Reuters report on Friday from Brussels, the Sunday newspaper said the French and German leaders were prepared to back a deal with other euro countries that might induce the ECB to intervene more forcefully to calm the euro debt crisis.

The newspaper report quoted German government sources as saying that the crisis fighting plan could possibly be announced by German Chancellor Angela Merkel and French President Nicolas Sarkozy in the coming week.

In an advance release before publication, Welt am Sonntag said that because it would take too long to change existing European Union treaties,euro zone countries should just agree among themselves on a new Stability Pact to enforce budget discipline – possibly implemented at the start of 2012.

It could be similar to the Schengen Agreement which applies to EU countries that choose to take part and enables their citizens to enjoy uninhibited cross border travel. Among the countries in the Stability Pact, there would be a treaty spelling out strict deficit rules and control rights for national budgets.

The European Central Bank should also emerge more as a crisis fighter in the euro zone, Welt am Sonntag wrote, saying that while governments cannot tell the independent ECB what to do, the expectations are clear.

“Based upon these measures, there should be a majority within the ECB for a stronger intervention in capital markets,” Welt am Sonntag said. It quotes a central banker as saying: “If the politicians can agree to a comprehensive step, the ECB will jump in and help.”

The ECB, which cannot directly finance governments, has been buying Italian and Spanish bonds on the open market since August to try to keep down borrowing costs for the euro zone’s third and fourth largest economies.

Yields on Italian and Spanish debt have nonetheless climbed in recent weeks, despite the ECB intervention and the appointment of a new technocrat government in Rome and the election of the conservative Popular Party in Madrid.

In Brussels on Friday, euro zone officials said a push by euro zone countries toward very close fiscal integration could give the ECB the necessary room for maneuver to scale up euro zone bond purchases and stabilize markets.

France’s Journal du Dimanche newspaper said reforms to Europe’s economic governance would be the focus of a speech which Sarkozy will deliver in the Mediterranean port of Toulon on Thursday.

“The European Commission could take on supra-national powers,” said one French presidency source, according to the newspaper, saying that Brussels would supervise the decisions of countries at risk of default, provided they request this.

“National parliaments will retain the initiative over the (policy) efforts to be made,” one French negotiator told the paper.

The European Commission, the EU executive arm, put forward proposals on Wednesday to grant it intrusive powers of approval of euro zone budgets before they are submitted to national parliaments, which, if approved, would effectively mean ceding some national sovereignty over budgets.

Berlin, meanwhile, is pushing to change the European Union treaty so that a country could be sued for breach of EU budget rules in the European Court of Justice.

Le Figaro said there was resistance within Sarkozy’s government to allowing France’s budgets to be submitted for scrutiny by an “intergovernmental conference” in Brussels, but the president would seek to rally support for this.

A closer fiscal union could eventually pave the way for joint debt issuance for the euro zone, where countries would be liable for each others’ debts.

Germany strongly opposes the joint issuance idea fearing spendthrift countries would piggyback on its low borrowing costs – meaning no gain for the virtuous and no pain for the sinners.

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