Clock ticking as Merkel and Sarkozy put on united front

THE EURO crisis returns with a vengeance to Europe’s political agenda this morning when the French and German leaders meet today in Berlin.

Today’s meeting comes amid renewed concern over Greece, and growing fears over Hungary. Chancellor Angela Merkel and President Nicolas Sarkozy know that their window for political manoeuvre is closing rapidly.

EU leaders have given themselves until January 30th to agree the legal detail of a new euro zone regulatory rulebook ahead of adoption in March while, simultaneously, creating a new inter-governmental scaffolding to hold it all up.

The Merkel-Sarkozy duo are anxious to present a show of political unity, despite vastly different political timetables.

After two years filled with state elections, Merkel has, barring upsets, almost no domestic hurdles to clear between now and her re-election in 2013. Thus her insistence that EU leaders follow a path of slow, steady institutional reform rather than push for a big-bang solution to the euro zone crisis.

Sarkozy doesn’t have the luxury of time: facing an uphill battle to return to the Élysée Palace in April, he needs proof for voters that France still shares the driving seat with Germany in euro stabilisation efforts.

Expectations of today’s meeting are modest: after calling for momentum to be maintained on “fiscal compact” talks, the two are expected to call for measures to boost growth and fight unemployment in the euro zone.

Such a call, in line with last month’s EU summit proposals, indicates the German leader is confident the new fiscal compact talks are on track and ready to move beyond her austerity-only euro zone strategy.

Crucially, however, she is not interested in measures that cost any money. Instead, she is likely to call for new initiatives to improve access of small and medium-sized enterprises to EU structural and cohesion funds.

Germany has proposed that funds not drawn down to be collected in a new fund, managed by the European Commission.

Sarkozy, meanwhile, wants to push ahead with a financial transaction tax and for a greater crisis-fighting role for the European Central Bank.

Britain’s David Cameron again dismissed such a tax at EU level yesterday and Merkel has yet to be pinned down on a timetable for the tax.

She knows that adopting such a proposal at euro zone level could open a can of worms in the current negotiations.

Ireland and others fear such a euro zone tax would see their financial sectors lose out to the City of London.

“We would like to see a global financial transaction tax but that is not possible at the present time,” said Merkel’s spokesman Steffen Seibert. “The German government would thus aim to introduce the financial transaction tax within the EU.”

The ongoing negotiations show that Europe is “slowly but surely” mastering the debt crisis, European Council president Herman Van Rompuy said at the weekend.

“We’ll put this crisis behind us, but it has taken longer than we hoped for,” said Van Rompuy to Belgian broadcaster RTBF. “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.” In the middle of the ongoing euro zone high-wire walk, the disintegration of Greece continues apace.

Forecasts that the economy would shrink by three per cent in 2012 now seem wildly optimistic: latest data suggest six per cent is more realistic, smothering any final hope that this would be the year that the economy would get a foothold.

With Greece already falling behind on its reform efforts, particularly on privatisations and tax collection, German officials concede that a new approach may be needed sooner rather than later.

“It’s up to Greece to decide if it wants to stay in the euro zone,” said Volker Kauder, Bundestag leader of Merkel’s ruling Christian Democrats (CDU) yesterday on German television.

With a mountain of Greek sovereign debt due in March, international banks are reportedly stonewalling International Monetary Fund demands that they accept losses on their investments of up to 90 per cent.

The mood beyond Greece is similarly gloomy: despite strong German data, the EU jobless rate is at a record high, retail sales are down and business and consumer confidence are on the wane. The euro tumbled to a 16-month low against the dollar on Friday.

Conscious of criticism of a Franco-German diktat, Merkel will welcome Italy’s Mario Monti to Berlin on Wednesday on his first official visit since becoming prime minister. She and Sarkozy fly to Rome on January 20th.

Parallel to this week’s political meetings, investors will be keeping an eye on Italian and Spanish bond auctions – the euro zone’s first big funding tests of the new year. The omens are not good: last week, Spanish 10-year bond yields rose by the most in almost 17 years.