Merkel and Sarkozy hammer out tough new EU treaty

These two were definitely talking with their mouths full. In just three hours, the German Chancellor and French PM compiled a list of reforms to help save the eurozone.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

Over lunch on Monday, ‘Merkozy’ was engaged in a political tug of war. On one side, Sarkozy clung grimly to his vision of a sovereign French nation, buffered by its alliance with the EU but free from subjugation. On the other, Merkel tugged relentlessly at the legislative rope, demanding greater unity across the EU nations to enforce stability and save the single currency.

Merkel was bound to gain ground. Against the backdrop of a stuttering EU economy, a downtrodden euro and a fast-approaching deadline for resolution – Friday, no less – an attempt to hang on to independence seems both archaic and mercenary: playground politics.

So here’s what was decided:

• There will be automatic sanctions for failing to meet a new ‘no more than 3% of GDP’ deficit rule.

• Goodbye unanimity. Hello qualified majority. Only 85% of the treaty nations need to agree in order for sanctions to be overturned.

• There will be a monthly meeting of eurozone leaders until the crisis ends. The leaders of EU nations must focus on growth throughout the eurozone, taking a more macroeconomic view.

• All eurozone governments must have firm plans in place for a balanced budget. Merkel has been impressed by Italian PM Mario Monti’s austerity cuts and expects all the other nations to show the same level of willing.

• The European Stability Mechanism will launch earlier, by 2012 ideally.

• ECB will neither a lender nor a borrower be. It will not lend cash or buy a transformational lump of debt.

• The Eurobond idea has been scrapped.

Sarkozy spoke to the press following the announcement, outlining the European Courts of Justice’s role under the new treaty: ‘All the 17 countries of the eurozone [will] have a golden rule on deficit that delegates equilibrium and balance. It's the ECJ that would look into whether the golden rule of every country is compatible. It respects sovereignty.’ The latter refers to the last scrap of independence left by the treaty. EU nations must toe the line, but they can decide how to meet the treaty’s requirements in their own way.

These reforms will be put to EU President Herman Van Rompuy on Wednesday. If he is in agreement, they will either be applied to all 27 EU members, or possibly just the 17 eurozone nations.

This has serious implications for Britain. Merkozy has stated in no uncertain terms that, being the two largest economies in the eurozone, Germany and France can push through a new treaty without Cameron’s say-so. If it is applied to all 27 countries, then that is effectively a treaty change which could see an EU referendum in the UK.

If the treaty is confined to the single-currency countries, the threat of referendum subsides. But that will bring its own problems. Namely, what James Kirkup of The Telegraph terms a ‘caucus’. The fear is that the eurozone, rendered more powerful through unity, could wage financial war on the City. It sounds fantastic, but then so did the death of the euro, 12 months ago.

The ink will be dry on the new treaty within three months. For Cameron, the message from Merkozy is clear: beware the ides of March.   

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