Merkel, Sarkozy Finalize Proposal for New EU Treaty

Leaders of the euro zone’s two largest economies have hammered out a joint proposal for a more economically unified Europe days ahead of a crucial summit.

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The European Union’s 27 heads of state will meet on December 9 to piece together a new multilateral plan to combat the region’s debt crisis after a comprehensive plan produced at a six-day summit marathon in October proved fruitless.

At the meeting, leaders will present a plan likely to contain various moving parts together meant to protect Italy and Spain, revise the economic governance of the euro zone, and to prevent further debt crises.

German Chancellor Angela Merkel and French President Nicolas Sarkozy held talks today in Paris where they hammered out a joint proposal to be presented at the summit in Brussels later this week. Speaking after his meeting with Merkel, Sarkozy said the “Franco-German agreement is very complete” and will be “written up in a letter and presented to [European Council President] Herman Van Rompuy on Wednesday.”

“Things cannot continue as they have done up until today,” he cautioned. “Our preference is for a treaty among the 27 [EU nations], so that nobody feels excluded, but we are open to a treaty among the 17 [euro members], open to any state that wants to join us.”

According to Sarkozy, the proposed treaty would include “automatic sanctions in the event of a breach of the rule on deficits below 3 percent” of gross domestic product. “We want a golden rule that is reinforced and harmonized on the European level so that the budgets of all 17 [euro nations] have a constitutional rule to ensure that national budgets move toward a return to equilibrium.”

Merkel also spoke to the press following her meeting with Sarkozy. Though neither leader presented the full proposal, Merkel did say that they will seek “structural changes that go beyond agreements. We need binding debt brakes, which can be verified by the European Court of Justice…in order for the Stability and Growth Pact to hold.”

Merkel and Sarkozy were expected to demand closer economic integration and tougher policing of fiscal rules in exchange for approving additional rescue funds to shore up euro-zone finances and safeguard banks. However, though the two were pushing for economic ties that would hold euro nations more accountable to the group, locking in tougher enforcement of budget rules, Sarkozy has in the past criticized Merkel’s proposal that budgetary offenders be hauled in front of judges.

In a speech to the German parliament on December 2, Merkel pushed her proposal to enforce stricter budget rules through EU treaty changes while reiterating her opposition to calls for quick action such as jointly-issued euro bonds or establishing the ECB as a lender of last resort. Today, Merkel said that, “regarding what we have said about the ECB, nothing has changed. We reject the idea of euro bonds.”

The ECB is already lending to banks in an attempt to stimulate the flow of credit to households and businesses, while also purchasing bonds to ensure its rates are transmitted on markets. The ECB unexpectedly cut its benchmark interest rate by a quarter point to 1.25 percent last month.

U.S. Treasury Secretary Timothy Geithner will arrive tomorrow in Frankfurt, the largest financial center in continental Europe and the seat of the European Central Bank, to press political leaders to be swift and aggressive in taking action. The ECB will hold a policy meeting on December 8, where economists expect policymakers to further cut interest rates.