France and Germany Push For Fiscal Union

France and Germany are expected to propose a fiscal union ahead of a December 9 summit that would set binding limits on euro-zone government borrowing, which many hope will open the way for the European Central Bank to bail out Italy and Spain.

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German Finance Minister Wolfgang Schaeuble said his government was working closely with the French on the proposal. “We are working intensively for the creation of a stability union,” he said in a statement. “That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits.” Germany and France are pushing for coercive powers to reject any budget that breaches EU rules.

However, treaty changes must be agreed to by all 27 European union member states, a task Schaeuble said may not be possible. As a condition of ratifying any new treaty, MPs in the U.K.’s ruling Conservative Party have been demanding a referendum on the U.K.’s EU membership, while Prime Minister David Cameron has said he will use it as an opportunity to demand new policy opt-outs from Brussels.

Some have speculated that the 17-nation single-currency zone will go it alone, thereby avoiding the need for EU treaty changes and circumventing a U.K. veto.

Though the ECB has yet to show any signs of stepping up purchases of government bonds, a move the Organization for Economic Cooperation and Development said is necessary to restore confidence in the euro area, many are hoping France and Germany will now find a compromise on greater ECB intervention, which Germany has resisted in the past.

Moody’s Investors Service today warned that the rapid escalation of the debt crisis threatened all European government bond ratings. “While Moody’s central scenario remains that the euro area will be preserved without further widespread defaults, even this ‘positive’ scenario carries very negative rating implications in the interim period,” the ratings agency said in a report.

“We won’t be able to save the euro if we don’t accept that national budgets will have to be a bit more controlled than in the past,” French Agriculture Minister Bruno Le Maire told Europe 1 radio. “We are in an economic war with a number of powerful speculators who have decided that the end of the euro is in their interest,” he said.

Giving up fiscal sovereignty is a sensitive issue in France, which has a strong Gaullist, nationalist tradition, but Le Maire said “the preservation of our common currency and our sovereignty” is more important. “What matters is that we ensure that budget discipline is respected within the euro zone. Otherwise the euro itself is threatened.”

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Though Le Maire had acknowledged that France and Germany are still at odds over greater ECB intervention to rescue the euro, he believes they will soon find a compromise.