In a meeting that was supposed to yield very little, German Chancellor Angela Merkel and French President Nicolas Sarkozy actually signalled some significant developments in addressing the sovereign debt crisis in the euro zone.On the other hand, neither proposed a systematic solution to the euro’s problems, which could be why the market is tanking.
What stood out more than anything from their press conference was their emphasis on harmonizing economic policy measures in France and Germany, the EU’s two largest economies. As if it was not clear enough before, there can be no denying that France and Germany are governing the euro.
While it seems as though Germany’s power has been increasing in the last few weeks to the detriment of France’s, Merkel risked increasing the extent of her domestic disapproval in making a strong statement confirming the two country’s support of the peripheral states struggling with sovereign debt.
An EU tax on financial transactions could garner the most resistance in the Bundestag, which has been increasingly divided between fiscal conservatives and moderates more accepting of radical measures like “eurobonds.”
Everyone should be happy about the “golden rule” for fiscal balance — which would hold eurozone nations’ debt to 60% of GDP. Over the past month, a number of countries have vowed to adopt balanced budgets or chalk up measures to cut their debts but we’ve had little sign up until now that they would actually go ahead with these plans.
Now it appears that the EU Commission — or the new governing body Merkel and Sarkozy alluded to in the press conference today — will have some disciplinary power in holding member states to euro-wide budgetary restrictions.
But overall, the conference yielded very little in terms of a specific plan to address Europe’s debt woes. While this was to be expected, we should not discount the fact that problems in the eurozone are escalating quickly and will need more than the approval of a Greek bailout to fix.