Sarkozy backs Merkel on economic reform

FRENCH PRESIDENT Nicolas Sarkozy has aligned himself with German chancellor Angela Merkel in her push for changes to the European treaties to fortify the EU’s economic system.

In a joint declaration issued in Deauville last night, the two leaders said they had reached a new consensus on measures to strengthen Europe’s system of economic governance.

The emergent alliance between Berlin and Paris came as EU ministers and their officials advanced a political agreement on new sanctions at a meeting in Luxembourg chaired by European Council president Herman Van Rompuy.

This agreement, still subject to the approval of EU leaders at a summit next week, can be introduced without any changes to the European treaties. Mr Van Rompuy described it as “a great step forward” in the EU’s economic system and “the biggest reform” of the euro since the single currency was created.

Mr Van Rompuy will present the measures to the summit, a meeting at which leaders will discuss further initiatives to establish on a permanent basis the ad hoc rescue fund for any distressed euro member.

“Sanctions will be more automatic, they will bite more quickly than they do at present,” euro group president Jean-Claude Juncker told reporters last night in Luxembourg.

The deal also places greater emphasis on debt levels and other macro-economic indicators when Brussels oversees the public finances of member euro members. “An early warning system will detect the risk of real estate bubbles or of unsustainable patterns on the balance of payments, or strong divergences in competitiveness,” Mr Van Rompuy said.

This was the biggest innovation, he added. “These types of risks were neglected in the first decade of the euro.”

EU economics commissioner Olli Rehn said the debate on sanctions now moves to the European Parliament and called for a constructive negotiating stance from MEPs and the council of EU governments.

Governments hope to introduce the new sanctions regime by 2012.

It will follow a new initiative next year in which EU governments will submit draft annual budgets to Brussels in every spring.

Although the agreement reached in Luxembourg waters down Mr Rehn’s original proposal for quasi-automatic sanctions against governments that persistently breach EU budget rules, he insisted the final outcome was “broadly in line” with his plan.

The deal reintroduces a greater than foreseen element of political discretion over sanctions, with a qualified majority vote by ministers required to place a government in the EU’s excessive deficit procedure and a similar vote required to find that a government is in persistent violation of the rules.

Sanctions can be blocked but only by a reverse qualified majority vote, meaning ministers have to vote not to impose a penalty suggested by the commission.

In Mr Rehn’s original plan, there was much less scope for political discretion.

Having pushed for sanctions to be imposed on a more automatic basis, Germany had resisted such measures but softened its stance as Mr Sarkozy came on board to back Dr Merkel’s push for treaty changes.

In contrast to the ministerial agreement reached in Luxembourg, the Franco-German initiative could not be invoked without changes to the EU treaties. Such measures are resisted in many European capitals, Dublin among them, not least because any such change would require a referendum in Ireland.

In addition to pushing for the establishment on a permanent basis of the ad hoc rescue fund, Paris is now supporting Berlin’s call for the development of an orderly insolvency procedure in the euro zone.

This is something resisted by the European Central Bank, but Mr Sarkozy’s decision to support Dr Merkel is likely to have the immediate impact of pushing it up the political agenda.

The joint declaration from Berlin and Paris caused some surprise in Luxembourg, as both countries were perceived to have adopted – in the words of one source – a “less than co-operative” stance in the talks.

Mr Sarkozy and Dr Merkel said it would be necessary to revise the Lisbon Treaty before 2013 in order to allow for a “permanent and robust mechanism” to punish states for excessive deficits.

Sanctions for serious breaches could include the suspension of a member’s voting rights, something requiring treaty change.

“The necessary amendment to the treaties should be adopted and ratified by member states in accordance with their respective constitutional requirements in due time before 2013,” they said.