France and Germany stand by eurozone plan

 
Angela Merkel and Nicolas Sarkozy at Paris meeting - 5 December Mrs Merkel and Mr Sarkozy said the eurozone needed a new treaty

France and Germany have reaffirmed their commitment to reform the eurozone, after ratings agency Standard and Poor's put most of the zone on "credit watch" over debt crisis fears.

The two countries said proposals for a treaty change agreed on Monday would reinforce governance of the eurozone.

They said their priority was to press ahead with the proposals.

S&P's move means six countries with top AAA ratings would have a 50% chance of seeing their ratings downgraded.

It was announced hours after French President Nicolas Sarkozy and German Chancellor Angela Merkel announced proposals they hoped would begin to restore confidence in the battered eurozone.

The ratings move came as a surprise to investors and saw stocks fall back on early gains as the euro also fell.

The BBC's Chris Morris, in Brussels, says there will be widespread anger at the timing of the agency's decision, which raises the stakes another notch ahead of an EU summit on Friday that is being seen as crucial for the future of the single currency.

Analysis

Diplomats from some of the smaller member states say they need to have a look at the fine print of the Franco-German proposals, because they want to know exactly how they plan to make this work.

It was important, they believe, to have an aura of confidence and togetherness about them at the beginning of this difficult week, but of course that aura was rapidly punctured by the news from Standard and Poor's. So we're still at a very difficult position and there's no guarantee that all countries will automatically sign off on whatever France and Germany suggest.

There's a general feeling that some sovereignty will have to be handed over. The critical question is who to. The smaller countries and Germany would like the European Commission to have a role in that.

But France has always been suspicious of handing too much power to institutions in Brussels and would prefer to see those powers still in the hands of member states.

Ahead of the summit, US Treasury Secretary Timothy Geithner is arriving in Europe to hold talks with top financial officials in several countries. On Tuesday, he will hold a meeting at the European Central Bank in Frankfurt before meeting German Finance Minister Wolfgang Schaeuble.

Our correspondent says that many details of the French and German proposals have not been revealed and other countries will reserve judgement until they have seen them.

Ratings decision

On Monday, S&P's announced that it had placed its "long-term sovereign ratings" on 15 eurozone nations on credit watch "with negative implications".

The ratings agency said the decision was prompted "by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole".

As well as Germany and France, Austria, the Netherlands, Finland and Luxembourg also currently have top AAA rating.

S&P's announcement means that there is a one in two chance that those countries would see their credit rating fall within 90 days.

Franco-German proposals

  • Automatic sanctions for any country which runs up a deficit of more than 3% of GDP
  • "Golden rule" built into eurozone members' budgets against running a deficit
  • Private investors never again to be asked to take losses, as in Greece
  • European Stability Mechanism (ESM) brought forward from 2013 to 2012, with decisions based on a qualified majority not unanimity
  • Eurozone leaders to meet every month as long as crisis continues to discuss growth

Analysts also say S&P's move reflects uncertainty about what would happen were a larger eurozone country - such as Italy - to default in future.

The agency's decision is uncontroversial, says the BBC's Robert Peston, because eurozone banks have been struggling to borrow, a number of eurozone economies are buckling under the burden of big government and household debts and there is a significant risk of recession.

Mr Sarkozy and Mrs Merkel said they would "take note" of S&P's warning.

French Finance Minister Francois Baroin later said that - for its part - Paris did not plan to expand the austerity measures it had already has announced.

Speaking on French radio on Tuesday morning, Foreign Minister Alain Juppe said that Monday's plan was "precisely the response to one of the major questions of this ratings agency that mentions the insufficiency of European economic governance".

Eurogroup Chairman Jean-Claude Juncker, meanwhile, described S&P's move as "a wild exaggeration and also unfair".

"I am not unsettled by this, but I am astonished, after the significant efforts in recent days to overcome the crisis, such as savings programmes in Italy and Ireland," Reuters news agency quoted him as telling German radio.

Five crucial days for the euro

  • Monday: Nicolas Sarkozy and Angela Merkel propose tighter eurozone controls
  • Italian PM Mario Monti seeks parliamentary approval for his austerity package
  • Ireland's government unveils details of its proposed austerity budget
  • Tuesday: US Treasury Secretary Timothy Geithner arrives in Germany before travelling to France and Italy for talks with euro leaders
  • Wednesday: The talking continues as many EU leaders gather in Marseille for a European People's Party congress
  • Thursday: ECB's monthly policy meeting could produce new measures
  • Thursday and Friday: Crucial EU summit in Brussels to consider Sarkozy-Merkel plan

The only two countries not put on credit watch on Monday were Cyprus, which is already under review, and Greece, whose rating has already been severely downgraded.

'Structural changes'

At their joint press conference on Monday afternoon, Mr Sarkozy said things in Europe "cannot continue as they are" and that the Franco-German wish was for "a forced march toward re-establishing confidence in the eurozone".

"We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders," he said.

Mrs Merkel said France and Germany were "absolutely determined" to maintain a stable euro and wanted to see "structural changes which go beyond agreements".

The two leaders said the treaty changes would ideally be implemented by all 27 EU member states, but that if that was not possible, just the 17 states which have adopted the euro.

Discussions on the changes should be concluded by March "because we must move quickly", said Mr Sarkozy.

 

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  • rate this
    -7

    Comment number 698.

    French President Nicolas Sarkozy & German Chancellor Angela Merkel are 2 prominent leaders Europeans ever had...If Eurozone countries avoid panicking and just follow these two leaders for the solution of debt crisis & economic woes, no doubt they will emerge out of the mess,

  • rate this
    -4

    Comment number 662.

    If the euro is here to stay we have to be in it. Why? Pre-2007 our currency was effectively pegged to the Euro at a rate of 70 p - 1 euro. 2011 how currency is effectively pegged at a rate of 85 p - 1 euro. Another 10 years and it will be 1 for ! and so on and so forth. Whatever the rights or wrongs we can't move ourselves geographically so must embrace or be on the poverty stricken periphery...

  • rate this
    +29

    Comment number 466.

    I live in the UK, I love France, Italy, Spain & Germany.

    I do not want to be run by them.

    Is that a problem?

    I enjoy visiting other countries, but why would I want to be run by them?

    Our different cultures make these visits very enjoyable, but how on earth would you merge them into one grey mess?

    To those who say keep your distinctiveness but merge financially and politically are just wrong.

  • rate this
    +21

    Comment number 379.

    Its markets and senior politicians only that want this union - if you talk to the people of ANY eurozone or EU country their anxiety is just like ours.

    As long as creditors want treaty change theres no room for democracy (and by extension, referendums). Just look at Italy and Greece - 1 month max to install unelected economists.

  • rate this
    +11

    Comment number 374.

    Much of what Merkel and Sarkozy are saying now is intended for the ears of their respective electorates, pandering to national self-interest and with an eye to their forthcoming elections. These are deaperate people who care nothing for what anyone else in Europe thinks, and are not listeneing either.

 

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