Tricky treaty

Economist
December 6, 2011

Angela Merkel and Nicolas Sarkozy have agreed on the framework of a fiscal deal, to be put to other heads of state at this week's summit. Charlemagne provides details here. There are a few key points worth making.

First, Germany and France would like the deal to be enshrined through treaty changes, approved by all 27 EU nations if possible, but by euro-zone members only if necessary. This is not a popular course of action but is a high priority for Ms Merkel. Second, fiscal rules are to be adopted by euro countries, which will require governments to keep deficits within tight limits. Importantly, these rules will not be subject to supranational enforcement. Ms Merkel's desire to have the European Court of Justice oversee budgets was not shared by Mr Sarkozy, and as a result national court systems will handle the process of keeping governments in line. Without explicit oversight of national budgets from Brussels, greater risksharing through euro bonds looks unlikely.

The deal backs away from the earlier insistence that private creditors share in losses on sovereign debt. Ms Merkel's effort to force private creditors to take losses on Greek debt generated criticism from corners of the market, where it was felt that a rubicon had been crossed and no euro-zone sovereign was safe from the possibility of private haircuts. And the creation of the European Stability Mechanism, the sucessor of the European Financial Stability Fund, will be pushed up from 2013 to 2012.

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