Merkel Meets Sarkozy to Draft EU Fiscal Rules as Part of Euro-Rescue Plan

By Patrick Donahue - Jan 9, 2012 4:03 PM GMT+0700

German Chancellor Angela Merkel and French President Nicolas Sarkozy will drive forward their agenda for stricter budget rules as they seek to craft a master plan for rescuing the euro over the next three months.

The euro and stocks rose as the two leaders prepared to meet in Berlin to flesh out a rulebook for budgetary discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area. At their first meeting of 2012, they will also discuss a financial-transaction tax and a Jan. 30 European summit that will focus on bolstering growth.

The German and French leaders have sponsored a plan to draw up new fiscal guidelines by March to resolve a crisis that began in Greece more than two years ago. As the contagion moves to the euro-area’s core, policy makers are struggling to persuade investors they can contain the risk and assure the single currency’s survival. Merkel and Sarkozy will meet at 11 a.m. and hold a joint press conference at about 1:30 p.m. Berlin time.

Fixing the crisis requires more “German largesse” through the current bailout programs, Goldman Sachs Group Inc. Chief European Economist Huw Pill told a London conference today. “Starting today with Mrs Merkel’s meeting with Mr Sarkozy, it’s important we do start to see some progress.”

Euro, Stocks

The euro rose 0.4 percent to trade at $1.2769 at 9:46 a.m. Frankfurt time. The single currency has extended its decline against the U.S. dollar last year, sliding 1.5 percent so far this year. The Euro Stoxx 50 (SX5E) Index rose 0.3 percent.

Borrowing costs for sovereign debt have increased. Spanish 10-year yields rose by the most in almost 17 years last week, leading bonds of the region’s most-indebted countries lower, on concern that they will struggle to cut budget deficits amid the economic slowdown. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence.

The meeting will be followed by a round of talks among euro-area leaders before the next summit meeting in Brussels on Jan. 30. Italian Prime Minister Mario Monti also will visit Berlin this week, and Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government.

Among the various moving parts in planning to resolve the crisis are Greek negotiations with bondholders, in their seventh month, to cut the country’s debt load in half. Olivier Blanchard, the International Monetary Fund’s chief economist, said Jan. 6 that debt reduction for Greece “could have to be larger” and the numbers will have to be worked out.

‘Not Good’

“The numbers are not good” for Greece, Blanchard said on CNBC television. “There’ll have to be substantial haircuts.”

Assembling the fiscal compact, which anchors debt limits into national constitutions and accelerates sanctions for violators, will entail creating a framework for euro members and other European Union states to draw up rules among themselves. The refusal by the U.K. to participate in a plan to alter EU treaties could complicate efforts by euro-area governments seeking to use EU institutions to police any new debt scheme.

Europe is “slowly but surely” mastering the debt crisis, even if a solution has taken longer than hoped, European Union President Herman Van Rompuy told Belgian broadcaster RTBF.

“We’ll put this crisis behind us, but it has taken longer than we hoped for,” Van Rompuy said yesterday. “We often acted a bit late and our decisions were often a bit too weak. But in most cases, we’ve worked in the right direction.”

Belgian Test

Europe’s newfound powers over national taxing and spending will get their first test this week when the European Commission prods Belgium to make deeper savings just a week into the budget year.

Under authority granted last month, the commission on Jan. 11 will decide whether an emergency Belgian spending freeze is enough to put the deficit on track to fall below euro-area limits in 2012. A negative verdict would expose Belgium to potential sanctions in a precedent-setting trial of rules.

Merkel and Sarkozy may also discuss funding for the European bailout fund today. Germany’s opposition to increasing the so-called firewall for struggling states was underscored last week, with German lawmakers expressing their resistance to raising the 500 billion-euro ($636 billion) ceiling for the permanent European Stability Mechanism, scheduled to go into effect this year.

No More

“There won’t be 1 cent more,” Markus Ferber, a European Parliament lawmaker from the Merkel-aligned Christian Social Union, said at a party meeting in the Bavarian town of Wildbad Kreuth on Jan. 5. Hans Michelbach, the ranking CSU member in the German parliament’s finance committee, said in an interview that “you can’t keep throwing more money at the problem, and that’s what increasing the ceiling would mean.”

The German and French leaders are also likely to discuss options for introducing a financial-transaction tax after Sarkozy said that France was ready to go it alone if necessary. Germany favors a Europe-wide tax.

Bringing the Italian premier into the fold contrasts with the tendency by Merkel and Sarkozy to hone a Franco-German position on crisis matters. It may mark a vote of confidence in the unelected Monti, who has pushed through budget cuts demanded by the EU after the resignation of Silvio Berlusconi.

Comments by Sarkozy and Italian Economic Development Minister Corrado Passera suggested a joint push for a greater European Central Bank role, a move Merkel has resisted.

Europe must have a “real central bank with the tools to do the job on stability and liquidity in the markets,” Passera said at a conference in Paris last week. Sarkozy said “all EU members and institutions must meet their responsibilities.”

To contact the reporter on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net