German Chancellor Angela Merkel and French President Nicolas Sarkozy meet for the first time this year to forge a joint position as they embark on a race to carve out a master plan to rescue the euro over the next three months.
The two leaders gather in Berlin Monday to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area. Their meeting is scheduled to start at 11 a.m. local time at the Federal Chancellery, followed by a joint press conference at about 1:30 p.m.
The German and French leaders have sponsored a plan to install new guidelines by March. A crisis that began in Greece two years ago has moved to the euro-area’s core and leaders are struggling to convince investors they can contain the risk and assure the euro’s survival.
“They urgently need to formulate and clearly communicate a vision for a sound and stable euro area that deserves the name fiscal compact,” Thomas Harjes, senior European economist at Barclays Capital in Frankfurt, wrote in a note on Friday.
The euro, which posted a second consecutive annual loss to the U.S. dollar in 2011, has extended the decline and dropped 1.7 percent so far this year. The currency lost 9.4 percent in the last six months.
Borrowing costs for sovereign debt also increased. Spanish 10-year yields rose by the most in almost 17 years last week, leading bonds of the region’s most-indebted countries lower, on concern that they will struggle to cut budget deficits amid the economic slowdown. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence.
Berlin, Brussels, Rome
The meeting will be followed by a round of talks among euro-area leaders before the next summit meeting in Brussels on Jan. 30. Italian Prime Minister Mario Monti will also visit Berlin this week and Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government.
Assembling the fiscal compact, which anchors debt limits into national constitutions and speeds up sanctions for violators, will entail creating a framework for euro members and other European Union states to draw up rules among themselves. The refusal by the U.K. to participate in a plan to alter EU treaties could complicate efforts by euro area governments seeking to use EU institutions to police any new debt scheme.
Europe is “slowly but surely” mastering the debt crisis, even if a solution has taken longer than hoped, European Union President Herman Van Rompuy told Belgian broadcaster RTBF.
“We’ll put this crisis behind us, but it has taken longer than we hoped for,” Van Rompuy said today. “We often acted a bit late and our decisions were often a bit too weak. But in most cases, we’ve worked in the right direction.”
Europe’s newfound powers over national taxing and spending face a first test this week when the European Commission prods Belgium to make deeper savings just a week into the budget year.
Under authority granted last month, the commission on Jan. 11 will decide whether an emergency Belgian spending freeze is enough to put the deficit on track to fall below euro-area limits in 2012. A negative verdict would expose Belgium to potential sanctions in a precedent-setting trial of rules.
Among the various moving parts in planning to resolve the crisis are Greek negotiations with bondholders, in their seventh month, to cut the country’s debt load in half. Olivier Blanchard, the International Monetary Fund’s chief economist, said Jan. 6 that debt reduction for Greece “could have to be larger” and the numbers will have to be worked out.
Numbers ‘Not Good’
“The numbers are not good” for Greece, Blanchard said on CNBC television. “There’ll have to be substantial haircuts.”
The two leaders may also discuss funding for the European bailout fund. Opposition by Germany to increasing the so-called firewall for struggling states was underscored last week, with German lawmakers expressing their resistance to raising the 500 billion-euro ($636 billion) ceiling for the permanent European Stabilty Mechanism, scheduled to go into effect this year.
“There won’t be one cent more,” Markus Ferber, a European Parliament lawmaker from the Merkel aligned Christian Social Union, said at a party meeting in the Bavarian town of Wildbad Kreuth on Jan. 5. Hans Michelbach, the ranking CSU member in the German parliament’s finance committee, said in an interview that “you can’t keep throwing more money at the problem and that’s what increasing the ceiling would mean.”
The German and French leaders will also discuss options for introducing a financial-transaction tax.
Bringing the Italian premier into the fold contrasts with the tendency by Merkel and Sarkozy to hone a Franco-German position on crisis matters. It may mark a vote of confidence in the unelected Monti, who has pushed through budget cuts demanded by the EU after the resignation of Silvio Berlusconi.
Comments by Sarkozy and Italian Economic Development Minister Corrado Passera suggested a joint push for a greater European Central Bank role, a move Merkel has resisted.
Europe must have a “real central bank with the tools to do the job on stability and liquidity in the markets,” Passera said at a conference in Paris last week. Sarkozy said “all EU members and institutions must meet their responsibilities.”
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