EU Stagnation Spurs French-German Bid for Fiscal Ties, Euro Governance (8/16)     Print Email
By European Affairs

Europe’s problems with some member states’ excessive debts is escalating into a crisis for the eurozone as a whole as economic growth drops below expectations even in the EU’s best-performing economies.

This dire new stage was recognized by a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy on August 16, the same day it was publicly disclosed that growth has stalled in Germany, Europe’s most powerful economy. France, its closest partner in EU leadership, has seen questions emerge about its economic stability, especially with regard to some French banks with large exposure to questionable loans in Greece and other troubled governments in the eurozone. For the moment, France maintains the highest market-ratings for credit-worthiness.

But both Berlin and Paris have now publicly recognized the need to move beyond the bail-outs for Greece, Ireland and Portugal:  they have staved off collapse, but they seem unlikely to protect the euro’s future without stronger convergence on financial unity among the 17 countries in the eurozone.

The German-French summit was meant to foreshadow the first steps toward deeper integration, and the results revealed fresh momentum – and also showed the current limits on the potential joint movement of these two countries,  which are often called “the motor of Europe” because of their galvanizing role for any collective European action.

What they promised – for September – was the creation of a “eurozone council” to shore up fiscal governance in the single-currency zone. This new body will comprise the chiefs of state of eurozone countries; its head will be EU President Herman Van Rompuy. So this new council is intended to muster political clout to back up the economic pressures applied by the European Central Bank.

What they did not promise – and actually explicitly rejected – was the creation of “euro bonds” that would be backed by all eurozone states collectively and thus afford a means for needier European governments to borrow money without having to turn to global markets. Germany is opposed to such bonds because they would likely harm German taxpayers by making the rich countries pay for the poor ones as well as raising borrowing costs for the richer countries such as Germany.

The resistance to euro bonds will be disappointing to global markets which, analysts say, see them as the most reliable guarantee for the euro’s future.

Both Sarkozy and Merket reiterated their commitment to defend the euro. But the French leader said that there was not enough EU fiscal integration – or enough democratic support – to make this step possible yet.

But Sarkozy said that the new eurozone council of heads of state will meet often enough to provide a measure of “eurozone economic governance” and help strengthen these countries’ national fiscal solvency by collective oversight and peer pressure.

The two countries agreed to harmonize their corporate tax rates from 2013 and to ask all 17 eurozone countries to enact constitutional provisions limiting deficits by summer 2012.

They also said that they would make a joint proposal in September about an EU-wide tax on corporate transactions. But they gave no details about this long-controversial idea, often called a Tobin tax (after the economist who first described it). Such a tax would generate income for EU governments, theoretically coming from big investors and market traders. But it is opposed by many financial centers (notably London even though Britain is not in the eurozone) as a measure liable to drive business away from Europe to competing marketplaces, notably New York.

Interesting, well-displayed graphics of recent national economic performance by EU states are available on this BBC site.


        ---  By European Affairs