PARIS French President Nicolas Sarkozy and German Chancellor Angela Merkel announced joint proposals on Monday to strengthen budget discipline in the euro zone to restore confidence lost in the currency area's sovereign debt crisis.
Following are key points in their agreement.
France and Germany will send a letter to European Council President Herman Van Rompuy on Wednesday suggesting that this week's European Union summit launch the procedure to amend the bloc's basic treaty to introduce stricter enforcement of fiscal rules. If not all 27 EU states are willing to change the treaty, then Paris and Berlin will pursue a separate treaty among the 17 euro zone members, open to others who want to join.
Both leaders said they wanted a clear decision by the end of the week on whether to proceed as 27 or 17. Then the treaty text would be worked out by mid-March, and open for ratification thereafter. They made no mention of holding a parliamentary convention, as required by the EU's Lisbon treaty.
NEW BUDGET RULES
The treaty amendment will enshrine more automatic sanctions against any country which does not respect the EU deficit limit of 3 percent of gross domestic product. Sanctions will apply on the recommendation of the European Commission unless a qualified majority of member states votes against the decision. That reverses the current procedure, where a qualified majority must vote in favor of sanctions for them to apply.
A harmonized "golden rule" requiring governments to balance their budgets within a specified period should be anchored in the constitutions of all 17 euro zone states. The European Court of Justice will be the ultimate arbiter of whether the national "golden rule" conforms with the amended treaty, but it will not be empowered to overrule individual national budgets.
Merkel and Sarkozy agreed that the statutes of a future permanent euro zone bailout fund, known as the European Stability Mechanism, will make clear that the debt write-down taken by private bondholders was a unique case. In future, the EU will observe International Monetary Fund principles and procedures so that euro zone bonds carry the same level of security as public debt anywhere else in the world. In practice, this means Germany has dropped its insistence on an explicit mention of a clause in new bonds stipulating that private bondholders may have to share the cost of any future bailout of a euro zone country.
France and Germany propose that all decisions in the ESM be taken by qualified majority vote, with a quota of 85 percent of votes for a positive decision, instead of by unanimity as at present. Merkel said this was to avoid the euro zone being blocked by a single country. This happened when Finland held up the expansion of the euro zone bailout fund to demand collateral on loans to Greece, and when a small party in Slovakia's ruling coalition opposed expanding the rescue fund and brought down the government over the issue. The proposed supermajority would give big states such as France, Germany and Italy a veto, but not smaller euro zone members.
MONTHLY GROWTH SUMMITS
With the euro zone heading into recession, Sarkozy said they proposed holding monthly summits of euro zone leaders until the end of the crisis to discuss measures to promote growth.
Merkel said issues to be discussed could include labor market reform and convergence of social welfare systems.
EUROPEAN CENTRAL BANK
The two leaders reaffirmed their agreement reached in Strasbourg, France, on November 24, that they have confidence in the European Central Bank, respect its independence and will refrain from making either positive or negative demands on it concerning crisis management steps.
EURO ZONE BONDS
Both leaders explicitly ruled out issuing joint euro zone bonds, a widely canvassed possible longer-term solution to the debt crisis. Sarkozy said they were "in no case a solution to the crisis", and it would be crazy for France and Germany to pay for the debts of other countries when they could not control their debt issuance.
(Writing by Paul Taylor)