December 5, 2011 / 8:15 PM / in 6 years

Analysis: Merkel, Sarkozy master plan has no new ideas

BRUSSELS (Reuters) - The grand plan outlined by France and Germany on Monday for European treaty change breaks no new ground in terms of ideas -- all the proposals already exist in various legal acts, the only problem is they have never been observed in practice.

If there is one difference it is that France and Germany, the political and economic motors of the euro zone, now want to assemble all the separate pieces of legislation into a single EU treaty. But otherwise, there is little change.

French President Nicolas Sarkozy and German Chancellor Angela Merkel will present their ideas to the rest of the EU at a summit on December 9, and argue that changing the EU’s basic law is necessary to prevent a sovereign debt crisis happening again.

But analysts doubt whether elevating pre-existing rules to treaty level will somehow make them tougher, or obeyed.

“This will no doubt build up substantial pressure on member states in the direction of better governance,” said Eckart Tuchtfeld, an economist at Commerzbank.

“However, we remain on the skeptical side as it is a willingness to live by the rules that will be decisive. The experience of the last years with the Maastricht Treaty suggests some caution here.”

In a joint news conference with Merkel in Paris, Sarkozy said one of their aims was to have automatic sanctions imposed on a country if it breaches the EU rule that a budget deficit should not be bigger than 3 percent of GDP.

Such a rule already exists in the new, revamped Stability and Growth Pact, which will come into force in mid-December, thanks to a large degree to the European Parliament.

The sanctions are imposed unless a qualified majority of euro zone countries votes against them -- exactly what Sarkozy said Paris and Berlin wanted under treaty change.

“This is just their lowest common denominator and nothing like the comprehensive package for economic and fiscal union that is required to convince the markets that Europe is serious about tackling its long-term debt issues,” said Guy Verhofstadt, a former Belgian prime minister and the head of the Liberal and Democrats group in the European Parliament.

“The summit this Friday should have a free and open discussion of all the measures on the table to end this crisis as quickly as possible.”

There is some irony in Paris and Berlin pushing for automatic sanctions -- since October 2010 they have exerted some effort in watering down automatic sanctions that were initially proposed by the European Commission in September 2010.

In a now infamous meeting in the French resort of Deauville, Germany surrendered its backing for full automatic sanctions in exchange for France’s support with imposing losses on private bondholders, a decision that still haunts the debt markets.

MORE BALANCED BUDGETS

Sarkozy also said on Monday that the two EU heavyweights wanted all euro zone countries to have a rule embedded in their constitutions requiring a balanced budget.

Euro zone leaders agreed at a summit on October 26-27 that euro zone countries would incorporate the aim of a balanced budget into national legislation, preferably in the constitution, by the end of 2012.

The rule that all EU countries, not only in the euro zone, should strive to achieve a budget close to balance or in surplus in structural terms has also existed in the Stability and Growth Pact since the beginning and is still there.

The problem was that countries ignored that rule because there was no way of enforcing it. That was also the problem with the original Stability and Growth Pact -- France and Germany both missed budget deficit targets in 2003, but rejected being disciplined, undermining confidence in the rules.

Now, under the revamped pact, a country can be fined for not moving towards balance, unless a euro zone ministers vote against it twice within one month -- the first time a qualified majority is needed to push the sanctions through. In the second vote the sanctions pass unless rejected by a simple majority.

The German and French leaders also agreed on Monday that the losses private investors are being compelled to take on their holdings of Greek government bonds will not happen again in the case of other euro zone countries -- again a mantra that has been repeated at euro zone summits for much of 2011.

Merkel added that the two leaders wanted binding debt brakes -- limits on how much debt as a proportion of GDP countries can run up -- that could be verified by the European Court of Justice, and she said both France and Germany rejected the idea of introducing jointly issued euro zone bonds.

The idea of debt brakes was already agreed on by all euro zone leaders in March this year, when they signed up to another piece of legislation called the Euro Plus Pact. Non-euro zone countries Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania also signed up to the pact.

The only entirely new element in Monday’s Franco-German plan is the possibility of taking countries to the European Court of Justice if they violate rules. But even that falls short of what Germany had originally been pushing for.

Now the court would only check if the country was observing its own rules on national debt brakes, rather than vetoing a national budget or imposing fines for missing targets -- something that was always unlikely to have EU backing.

The final proposal of having a euro zone leaders’ summit every month until the crisis ends has almost been implemented in practice already -- the euro zone has had 16 summits since January 2010, an average of one every six weeks.

Reporting By Jan Strupczewski; editing by Ron Askew

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