Cause and Effect in European Politics and Law

Sarkozy: Eurobonds are the end of European integration, not the beginning

Ralitsa Kovacheva, Desislava Dimitrova, August 19, 2011

The meeting of German Chancellor Angela Merkel and French President Nicolas Sarkozy in Paris didn’t produce any surprises. Franco-German meetings and phone calls have already been part of the routine governance of the euro area and any news are largely foreknown. This was the case with the proposal, officialised in Paris, the economic governance of the eurozone to be entrusted to a “government”, consisting of the seventeen euro area leaders and headed by the President of the European Council, Herman Van Rompuy.

“The royal couple of the euro area”, as media called Angela Merkel and Nicolas Sarkozy, has governed the single currency union for more than a year. France was insisting the governance to be institutionalised precisely in the face of Herman Van Rompuy. For a year and a half, the former Belgian prime minister and haiku poet has shown himself as an diligent, non-confrontational and inconspicuous person. He is expected to convene the “government” twice a year and obviously – to familiarise it with the decisions of the “royal couple”, who communicate much more regularly. However, it cannot be denied that being the president of the European Council, which involves the leaders of the 27 EU member states, Herman Van Rompuy will act as a link between the euro area and the other ten, so that the separation of the seventeen is not accepted dramatically by the rest.

The first decision of the new “government” is already known - the countries to enrol in their constitutions the so called debt brake – a rule stating that they must balance their budgets. As Nicolas Sarkozy said, “it will not be an optional rule but rather obligatory," because “the euro is not just a right, it's a set of rules, a duty, discipline”.

It is about “improving the culture of stability,” Chancellor Angela Merkel explained. Somewhat surprisingly, however, sounded the statement that the Commission should obtain more rights to act when member states fail to take proper actions themselves. Some time ago, while presenting the original version of the pact for competitiveness, adopted as the Euro Plus Pact, Ms Merkel made it clear that she did not want more involvement of the European institutions. Then Der Spiegel magazine wrote about a meeting of Angela Merkel and Commission President Jose Manuel Barroso, where he had strongly opposed the idea the Commission to be isolated from the developments in the euro area, while Ms Merkel comforted him by saying that he would be entitled (only) to attend the meetings of the seventeen.

Now, however, Angela Merkel said: “We want a self commitment of our parliaments. If the Commission makes critical comments on a national budget that it has been presented with, then the euro states i.e. their parliaments must commit themselves to not simply take note of these critical comments and then put them aside but rather to act upon them.”

Moreover, the EU Structural Funds should be aimed at boosting competitiveness and growth in member states and the Commission should have more rights to control their spending: “For member states which show weaknesses in their implementation of the Growth and Stability Pact, we propose that the Commission gets a stronger right to say in the matter, and the case may be with some crisis countries that it also gets to directly intervene to some extent to make sure the funds are being used to accelerate competitiveness and growth.”

To demonstrate the need for greater convergence in fiscal and economic policies of the eurozone countries, France and Germany will introduce a common corporate tax base in 2013, as well as a common rate for French and German companies. Both countries will coordinate the economic scenarios on which the budgetary frameworks will be based and will promote the efforts a financial transaction tax to be implemented internationally.

In fact, if there are any news from the meeting at all, they start with “no”.

“No” to the proposed increase of the rescue fund for the euro area: “In recent months we created a fund of 500 billion euros. These are absolutely considerable figures, and they haven't been used up - far from it. Still some say that we should double it. And I don't know why some people aren't proposing to triple it. And if we tripled it, at the next press conference we would be asked why we didn't quadruple it,” Nicolas Sarkozy retorted.

As expected, we heard “no” regarding the idea of creating Eurobonds, which has recently gained new popularity. Despite the resistance, especially of Germany on the issue is well known, financial markets inexplicably proved disappointed by the lack of “good news”. It is understandable why investors would feel safer buying not Italian or Greek debt, but bonds guaranteed by the eurozone as a whole, but at this stage the position of Paris and Berlin is unchanged. “Euro bonds can be imagined one day, but at the end of the European integration process not at the beginning,” President Sarkozy clearly said. Angela Merkel noted that Europe has gone far from seeking its last resort and the problems couldn’t be solved with a bang. According to her, trust can be restored only step by step, but Eurobonds won’t help in this.

However, there are signs that the German position may soften, moreover - it may happen sooner than expected. Der Spiegel magazine quoted some representatives of Merkel's CDU party, saying that Eurobonds should not be demonised and all options should be discussed, including the conditions under which Germany would accept them. Another fact in favour of Eurobonds' proponents is that only last week the European Central Bank bought eurozone debt worth 22 billion euros. And the rumours that France may lose its AAA credit rating are hardly calming Berlin.

On top of that, just hours ahead of the meeting in Paris it became clear that German economy grew only 0.1% in the second quarter, which is significantly less than the expected 0.5%. Against the backdrop of its strong performance earlier this year, Berlin was widely expected to be literally the engine of eurozone's recovery. Now, however, doubts are more than hopes.

The outcome of the meeting was defined as “disappointing” by the leader of the Alliance of Liberals and Democrats for Europe's group in the European Parliament, Guy Verhofstadt (this is the only parliamentary reaction to this point). According to him, a real economic governance of the euro area cannot be provided by leaders, meeting once in every six months. The governance of the euro area should be entrusted to a group of commissioners, specifically responsible for the euro area and led by the Commissioner for Economic and Monetary Affairs, Guy Verhofstadt stated. Moreover, one of the tools of this governance must be precisely Eurobonds – a position, expressed repeatedly by the ALDE leader in recent months. He said what was needed to rescue the euro was “a quantum step towards a federal Union”.

This step, however, if made now, would be more a result of the pressure of the circumstances rather than a conscious and wanted choice of the member states. “The weak” countries want to take shelter under the wing of “the strong” and “the strong” have no choice but to “save” them to avoid being swept altogether. One of the lessons of the debt crisis is that such “marriages of convenience” sooner or later come to the question of trust. Because it must be a premise, not a result. Currently, Europe is trying to revive global trust to itself. But the other problem remains - trust among the member states. All measures proposed and implemented to date aim at more control and more discipline, but this does not solve the long term problem with trust. On the contrary, it indicates that the illusion of mutual trust and shared values is irreversibly buried.