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19th Jan 2020

Franco-German deal would see EU court police national budgets

  • The European Court of Justice could be given powers over budget discipline (Photo: Présidence de la République - P.Segrette)

German Chancellor Angela Merkel and French President Nicolas Sarkozy have endorsed an awkward compromise on the wielding of sanctions by the EU's top court against allegedly fiscally wayward governments.

In what at first glance looks like a victory for the French leader, the pair made it very clear after their meeting in Paris on Monday (5 December) that the European Court of Justice cannot "annul a national budget".

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However, the two leaders - which Brussels wags have collapsed into the portmanteau 'Merkozy' for their choreographed efforts to steer the Union - did say the top court could assess whether national budgets have obeyed "golden rules", namely new laws or constitutional constraints forbidding excessive deficits and debts.

Heading into the meeting, the Elysee had made it known that the favoured Merkel option, giving the ECJ the automatic power to impose sanctions on fiscal miscreants, was a step too far in terms of a transfer of national sovereignty to an unelected body.

Berlin meanwhile believes that only a full 'fiscal union' - with budget discipline taken out of the hands of politicians - will be sufficient to calm the markets. The most automatic of options would involve the ECJ being the enforcer behind a new, economic 'super-commissioner' who would supervise national budget-making processes.

Monday's fudge allows Sarkozy to claim a victory for France, while under pressure ahead of presidential elections in 2012 both from the Socialist Party and a resurgent far right not to dilute national sovereignty.

Merkel for her part still gets most of her way, with the court given most of the powers she was seeking.

Such moves would require a change to the EU treaties, and indeed, the Franco-German duo also said that they back a new treaty, but said that while they would prefer to achieve one at the level of all 27 member states, they are willing to accept one amongst just the 17 states that use the single currency.

Both routes are perilous.

At the level of the full 27, changing the EU treaties will be an arduous and long process for which the markets likely do not have patience.

However, at this level, the powers of sanction against excessive deficits would be more powerful, as they could be wielded by the commission and, potentially, the ECJ.

At the level of the 17, the passage of such a treaty could be much faster, but new eurozone-level institutions that could impose sanctions would likely have to be constructed.

Either way, EU power-brokers would be faced with the likely resistance of citizens. After the debacle of the defeat of the European Constitutional Treaty at the hands of voters in France and the Netherlands, leaders agreed to never again put such decisions to the people. However, Ireland’s constitution requires such a plebiscite.

Having barely pushed through a second vote on the Lisbon Treaty in 2009 in the country, political elites on the island are loth to try their luck a third time, particularly when anger at the EU over the imposition of austerity on the country and supervision of ministries by the men and women from the EU-ECB-IMF troika.

Euro-bonds

Merkel appears to have won a much more clear-cut victory over the question of 'euro-bonds' - the sharing of the issuance of government debt amongst the 17 eurozone states.

Sarkozy, a known supporter of the idea, capitulated to Berlin's firm opposition, saying: "Euro-bonds are in no way a solution to the crisis."

While both the German government and the Frankfurt-based ECB have consistently opposed the idea of the central bank massively expanding its programme of the purchase of peripheral eurozone debt, last week, newly minted ECB chief Mario Draghi hinted that such a move could occur so long as a "fiscal compact" was put in place first.

With France conceding on the question of automatic sanctions and a role for the ECJ, Berlin and Frankfurt are now in principle free to sign off on such central bank intervention.

One idea on the table would see the ECB lend funds to the International Monetary Fund, which in turn would pass on the funds to eurozone states. In this way, the ECB gets around rules that prevent the bank from acting as a lender of last resort and delivering support to governments directly.

US comes to town

Meanwhile, in an expression of the terror gripping Washington that the EU may not get its act together in the coming days, on Tuesday, US Treasury secretary Timothy Geithner travels to Germany, France and Italy for chats with the leaders of the three countries.

The leaders of Europe’s right-wing parties, who dominate the capitals of Europe, then on Wednesday hold a pow-wow in Marseilles, offering another occasion for consideration of the way forward for Europe.

Then on Thursday, ahead of a two-day EU summit beginning in the evening in Brussels, the ECB will hold its monthly meeting, where the world will be watching to see if the Franco-German plan is sufficient to convince it to open the taps.

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