Merkel, Sarkozy demand tough new EU pact

2011-12-06 09:22

Paris - France and Germany called on Monday for Europe's leaders to agree on strict rules for fiscal discipline at their summit this week, as S&P threatened sweeping ratings downgrades if they fail to act to end the eurozone debt crisis.

The bold call by President Nicolas Sarkozy and Chancellor Angela Merkel for a rewrite of the EU treaty to set uniform tough budget standards across the eurozone raised hopes that the region might finally take decisive, comprehensive moves to end the crisis.

But S&P's warning hours later that it might cut the ratings of the two giants and 13 others if they continue to dither raised the stakes for the Brussels summit on Thursday and Friday.

The summit is "an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date... and advance a credible response to the crisis that would go far towards restoring investor confidence," S&P said.

"If the response of policymakers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downwards" that could force the downgrade, it said.

Sarkozy and Merkel appeared united and determined on Monday when they offered a new direction for the single currency zone as it teeters on the brink of collapse.

The two backed automatic sanctions against EU member states whose deficits go over 3% of gross domestic product.

They also called for a "reinforced and harmonised golden rule" on deficits, which could oblige some states to enshrine the commitment to balance their public finances in their constitution or legislation.

The new rules would be enshrined in a rewritten EU Treaty signed by all 27 EU members or, as an alternative, by just the 17 eurozone members with the other nations signing on a voluntary basis.

Sarkozy warned of a "forced march to reestablish confidence in the euro and the eurozone".

"The goal that we have with the chancellor is for an agreement to have been negotiated and concluded between the 17 members of the eurozone in March, because we must move quickly," he said.

The Franco-German proposal is to be detailed in a letter to EU president Herman Van Rompuy on Wednesday.

Hours later S&P upped the stakes though when it said that, without strong action in Brussels, AAA-rated Germany, Austria, Finland, Netherlands, and Luxembourg, and AA-rated Belgium, could all be cut by one notch.

France, also AAA, and eight others with lower ratings faced up to two-level cuts.

S&P said it would complete its ratings review "as soon as possible" following the summit.

It said credit conditions were tightening and sovereign borrowing costs rising across the euro area, and that it was facing a plunge back into region-wide recession next year.

Added to this mix were "continuing disagreements among European policymakers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members".

Reacting to the S&P warning, France and Germany "in full solidarity" confirmed "their determination to take all the necessary measures, in liaison with their partners and the European institutions to ensure the stability of the euro area".

Meanwhile in Italy, its finances most at risk of failing in current market conditions, new Prime Minister Mario Monti presented a tough austerity package of cuts, taxes and pension reforms to parliament, warning of a Greek-style "collapse" if it is not adopted.

In Ireland Prime Minister Enda Kenny announced a €3.8bn austerity budget, a day after warning citizens to brace for years of economic hardship during a historic television address.

Greece on the other hand got good news when the International Monetary Fund released a much-needed €2.2bn in bailout money after months of delay.

That is likely to be matched by €5.8bn pending from the European Union, seen as enough for the short term to help Athens avoid defaulting on its debt while it negotiates with commercial lenders.

Italian bond rates fell below the 6.0% threshold for the first time since the end of October, and rates also dropped on Spanish and French bonds, although they rose for Ireland.

London, Paris and Frankfurt stock markets all closed higher, and Milan's jumped 2.9%.

But early reports of the pending S&P move took the air out of both the euro and US stocks.

After rising to $1.3487 on the Merkel-Sarkozy statement, the S&P story sent the euro sinking back down to $1.3394 by 22:15 GMT.

The Dow Jones Industrial Average had put on 1.4% by midday, but dropped back and ended only 0.65% higher.