Stakes are high

German Chancellor Angela Merkel and French President Nicolas Sarkozy hope to push through something they had refused to even consider a year ago. Countries that rack up too much debt should be subject to penalties that they will not be able to fight, they now say.

The stability pact, which is supposed to maintain fiscal discipline within the single currency, is now meant to become a reality. On Friday, the other EU states - or at least the other 15 states that share the common euro currency - will be asked to agree.

Merkel and Sarkozy will not be keen to debate the matter for long. With the crisis now threatening the very existence of the eurozone, things will have to move quickly. If the euro fails, Europe fails, as Merkel has said on more than one occasion. This is about saving the European Union - nothing more, nothing less.

Germany and France have decided. A new treaty for fiscal union in addition to the existing European treaties must also be agreed upon. The possible break-up of the EU into various groups is exactly what the chancellor wanted to avoid, but the urgency of the situation gives her no choice.

There are problems, however. There is to be no central access to the national budgets of eurozone countries. The surrender of budgetary control did not appear to be possible, as far as the two leaders were concerned. It would hardly have been possible in their own countries. In Germany, there would at least be the need for an amendment to the constitution. In France, President Sarkozy faces reelection in the spring. Already, his critics accuse him of betraying French interests.

As a mild compromise, the two politicians are now proposing a so-called "debt-brake." This would be an automatic cap on new debt to be monitored by the European Court of Justice.

It has now also been decided that the European Stability Mechanism (ESM) should be up and running by the end of 2012, six months earlier than originally planned. This is a half-hearted measure in the right direction. Why the ESM cannot be operating within a few weeks is something known only to Merkel and Sarkozy. The ESM would probably need a banking license in order to borrow money from the European Central Bank. This is something that Merkel and Sarkozy have still not proposed. What they are waiting for remains a mystery.

The idea of giving encouragement to financial markets by completely removing risks to future private investors is well thought out. The participation of banks in the partial debt write-off for Greece is being presented as some type of one-off accident. Merkel and Sarkozy have realized that, with their insistence on such debt cuts, they have alienated investors across the world.

It will take some months for the new and hopefully stable fiscal union to be established. For that reason, Merkel and Sarkozy have tacitly implied that the European Central Bank should continue to buy up the government bonds of struggling nations. That is not part of its mandate, but there is no other way to provide money in the short term.

The two leaders reject the notion of common bonds for the eurozone countries, the so-called eurobonds. For now. Eurobonds might just be possible when there is a truly functional fiscal union. But only then.

Another way to tap new sources of funding, still not officially proposed, is in the works. The national central banks are supposed to provide the International Monetary Fund (IMF) with new money which the IMF is then supposed to distribute to Greece, Ireland, Italy, Portugal, Spain and others. This little detour covers up the fact that, for this, euros must be printed and the supply of money stretched.

Now Merkel and Sarkozy must convince their European counterparts of their proposals. They are demanding a lot and are taking a huge risk. If there are no clear results from the summit, the eurozone may have missed its last chance to save the common currency.

Author: Bernd Riegert / rc
Editor: Holly Fox