German Chancellor Sees European ‘Fiscal Union’

Posted December 2nd, 2011 at 2:30 pm (UTC-5)
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German Chancellor Angela Merkel is calling for a European “fiscal union” with stringent spending oversight to resolve the continent's debt crisis and save the common euro currency.

Ms. Merkel told the German parliament Friday that significant European Union treaty changes need to be made to enforce spending limits throughout the 27-nation bloc, and to punish governments that violate the controls. She said the “future of the euro is inseparable from European unity.”

The German leader rejected calls by some financial experts for the sale of special bonds denominated in euros and jointly backed by the EU member states to limit borrowing costs for Europe's debt-ridden governments. She said that would be “unthinkable” as long as governments retain control over their spending. She also opposed a greatly expanded role for the European Central Bank, to let it become the continent's lender of last resort.

Greece, Ireland and Portugal have already been forced to secure international bailouts over the last year and a half. The chief fear now for European leaders is that Italy, with the continent's third biggest economy, may also need a bailout to avoid defaulting on its debts – a crisis that would threaten the continent's monetary union and could lead to a renewed worldwide recession.

Ms. Merkel and French President Nicolas Sarkozy are to meet in Paris on Monday to announce a joint German-French plan to resolve the crisis, ahead of an EU summit next Friday in Brussels. Mr. Sarkozy has told his nation that Europe would be “swept away” if it does not resolve the debt contagion.

Even if spending controls are adopted, Ms. Merkel said it will take years to resolve effects of the two-year debt crisis. She likened the effort to that of wearied marathon runners who realize they can reach the finish line, if they are “conscious of the magnitude of the task from the very start.”

Mr. Sarkozy discussed the French-German call for EU treaty changes with British Prime Minister David Cameron at a meeting in Paris. Britain, with its own currency, is not part of the eurozone, but a collapse of the euro would greatly affect the British economy.

After the meeting, the British leader applauded the effort for sweeping changes.

All 27 EU nations would have to approve changes to the 1992 Maastricht Treaty that created the EU, but that broad approval may not be necessary if spending controls apply only to the 17 nations that use the euro as their currency.

Ms. Merkel said she is looking for a broad agreement on treaty changes.

On Thursday, European Central Bank President Mario Draghi said the bank might give new assistance to the continent's debt-ridden governments, but only if the eurozone countries first adopt “a new fiscal compact” to control the spending of individual countries.

Draghi said more centralized oversight of budgets is “the most important element” for the eurozone to adopt before the bank would consider increasing its current limited purchase of government debt.