Germany as the Next World Superpower

Germany, France Push Reforms to Tackle Crisis

February 4, 2011

AP – France and Germany pushed other eurozone countries to sign up for tough measures to limit debt loads, make their economies more productive, and stamp out the government debt crisis that has crippled their currency union over the past year.

In a joint news conference Friday with French President Nicolas Sarkozy, German Chancellor Angla Merkel said governments should decide soon — by the end of March — on a so-called "pact for competitiveness" bringing the 17 countries that use the euro closer together in the way they run their economies.

German and French officials indicate the pact could include calls for putting debt limits in national constitutions, raising retirement ages to match increased life expectancy, and getting rid of salary increases tied to inflation.

They also want countries to set up orderly ways to handle bank failures and agree on a common base for figuring corporate taxation.

The debt crisis that has pushed Greece and Ireland to take international bailout loans has underlined a key vulnerability of the euro — one currency with one central bank, but 17 governments. There's little way to keep individual countries from undermining the shared currency with overspending, banking disasters or growth-choking policies.

The two leaders presented their proposal to their eurozone counterparts over lunch on Friday, as part of a broader discussion over plans to overhaul the region's euro440 billion ($600 billion) bailout fund to make it more effective in stemming the crisis.

Within a year, eurozone states should demonstrate on "very concrete points" that they are serious about making their economies more competitive, Merkel said.

Some of the demands already tabled will surely be tough to swallow for some governments. Belgium and Luxembourg would have a hard time taking away automatic salary increases from their citizens, while the Irish — already feeling humiliated after being forced to take a euro67.5 billion bailout — are unlikely to make any concessions on their corporate tax rate, one of the lowest in Europe.

Austrian Chancellor Werner Faymann, usually a supporter of German demands for more fiscal discipline, said that outside intervention in wage negotiations was "wrong," adding that he thought it was unlikely the EU would be allowed to regulate retirement ages.

The leader of Germany's main opposition party, meanwhile, has called the pact a "fig leaf," designed to distract taxpayers from having to put up yet more money to save weaker eurozone states.

The European Commission, the EU's executive, and some national governments have said the European Financial Stability Facility (EFSF), the eurozone's contribution to the region's euro750 billion ($1 trillion) bailout fund, needed more powers and money. If decided, that would constitute a fundamental overhaul of Europe's crisis strategy. So far, that strategy has revolved around offering expensive bailout loans to countries on the brink of bankruptcy in return for painful budget cuts and economic restructuring.

Many analysts have warned that those cuts make it almost impossible for already struggling economies to start growing again. The European Central Bank has also supported a wider role for the EFSF, all too happy to abandon its government bond buying program and focus on keeping inflation in check. Among the suggestions: letting the facility buy the bonds of vulnerable governments on the open market, thus stabilizing their price and borrowing costs; providing countries with a short-term liquidity line when one-off measures like expensive bank recapitalizations threaten to sink their finances (as with bailed out Ireland), or even lending them the money to buy back their own bonds.

Right now, bonds issued by cash-strapped states like Greece, Ireland or Portugal are trading at a discount due to doubts over the governments' ability to pay them back — theoretically making a buyback an easy way of cutting a country's overall debt. To do that, the EFSF would likely need more money, and the Commission has asked states to lift the fund's effective lending capacity to the euro440 billion initially advertised. At the moment, it can only lend about euro250 billion due to various buffers required to make the EFSF's bonds attractive to investors.

On top of that, there's a push to cut the interest rates already bailed-out Greece and Ireland have to pay for their rescue loans. New bank stress tests, to be published this summer, are meant to clear up holes in the European banking system that previous rounds of tests failed to reveal.

At their meeting Friday, leaders are unlikely to decide in detail what concrete new powers will be given to the EFSF, but would signal a general willingness to make the fund more effective, said an EU official. The official was speaking on condition of anonymity because discussions were still ongoing.

Draft conclusions for the summit seen by the Associated Press, included a joint statement by eurozone leaders saying that by the end of March they would submit "concrete proposals" to strengthen the EFSF so that the "flexibility" and financial capacity necessary for adequate support could be ensured.