France and Germany agree on new rules for euro zone
In the end, both sides compromised a little, but Angela Merkel got most of what she wanted; new rules governing the "fiscal union" that will seize sovereignty from european states, forcing them to abide by tax and budget decisions made in Brussels about their own economies.
France and Germany have reached a "comprehensive" agreement on new fiscal rules for the beleaguered eurozone, as a package of measures designed to save the single currency begins to take shape.
The proposals, which include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs, were announced by Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, in Paris on Monday. Together with tough budgetary measures drawn up by Mario Monti's new Italian government, they will form part of the "fiscal compact" demanded by the European Central Bank to enforce budgetary discipline in the single currency region.
In an apparent concession, Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece's second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.
Ms Merkel said it was imperative to show that Europe was a "safe place to invest".
Mr Sarkozy, in turn, agreed to Ms Merkel's demand for a revision of the full EU governing treaty to enshrine an enhanced fiscal disciplinary regime. Ms Merkel, however, watered down her demand that the European Court of Justice adjudicate breaches of fiscal rules.
Merkel's agreement that there will be no more haircuts for private bond holders is a small concession. In the event of default by Italy or Spain, those bond holders would get nothing anyway.
The agreement will now be taken to a full meeting of the EU on Friday where it is expected to pass. Implementing the conditions may be another story, however. Sarkozy successfully lobbied to water down the more draconian enforcement provisions which means that when push comes to shove, Brussels may try to bully a country into fiscal sanity, but sanctions may be more difficult to achieve.
Can it save the euro? Italian and Spanish bond yeilds collapsed yesterday, falling below 6% and 5% respectively. This is because the European Central Bank has been signalling that if this fiscal union is achieved, the ECB will massively intervene in the bond market. That's the kind of news that cheers investors and quiets the markets.
Merkel and Sarkozy have taken the euro zone one step back from the precipice. It's up to the rest of Europe to continue moving away from the cliff and get back to firmer ground.