Europe to Clamp Down on Debtor Nations

Governments which breach European Union budgetary guidelines should have their EU voting rights "suspended" to prevent any resurgence of the debt and euro crisis, France and Germany said last night.

In a show of unity after reports of sharp Franco-German divisions on the future governance of the euro, Chancellor Angela Merkel and President Nicolas Sarkozy said that they would put forward common proposals—including amendments to the EU treaties if needed— to punish member states who ignored debt and deficit rules.

The two leaders, who were forced to cancel a meeting last week because of the depth of their disagreements, also put forward a compromise plan for an "economic government" of the EU. President Sarkozy dropped his idea that there should be a formal new institution to govern the activities of the 16 nations within euroland. He accepted Ms Merkel's insistence that the only "economic government" of the EU should be the twice-yearly meetings of all 27 heads of state or government.

In a sop to the French position, however, Chancellor Merkel accepted that there could, in future crises, be informal, "pragmatic" meetings of the leaders of euroland.

The Franco-German ideas—which bore signs of the visible stitches of an uneasy compromise—may cause as many problems as they solve when presented to other EU leaders at a summit in Brussels on Thursday. The idea of new negotiations to change the EU treaties will fill other governments with dismay. Such a proposal is likely to be rejected out of hand by the Prime Minister, David Cameron.

President Sarkozy said that it was not absolutely clear that a treaty change would be needed to allow backsliding governments to be deprived of their EU vote. EU officials said there was nothing in the present treaties to allow such draconian punishment and there would need to be a new round of treaty reform negotiations. "If a treaty change is needed we will propose it," Mr Sarkozy said.

Overall, the uneasy compromise struck in Berlin yesterday between the two leading powers within the euro appeared to be a clear victory for Chancellor Merkel. Germany has insisted that the euro must be strengthened by steepening the budgetary discipline, and punishments, imposed on members of the single currency. Berlin has strongly resisted any suggestion that there should be a new institution to govern the finances of euroland.

President Sarkozy had wanted, until last night, to avoid a too punitive approach. He argued that the Greek debt crisis and market attacks on the euro proved that the single currency needed a single "political" government, something successive French governments have demanded.

Whether the compromise sewn together in Berlin yesterday will satisfy markets, or other EU governments, is open to doubt.

At a joint press conference, President Sarkozy rejected suggestions that Paris and Berlin—which have steered EU policy for so long—were now deeply divided on the future management of the single currency. "People misunderstand the relationship between Chancellor Merkel and myself," he said. "We are both people with deep convictions. We do not reach easy, hypocritical agreements. We discussion our differences face to face."

He said that the Franco-German proposals entirely covered France's demands for an "economic government". Paris accepted that this should be mostly a subject for all 27 states but it was now agreed that EU leaders—and not just finance ministers—could also meet to discuss crises within euroland.

Ms Merkel and Mr Sarkozy also announced that they would be making joint proposals to the G20 summit in Toronto later this year for a tax on all international financial transactions. Ms Merkel said she and Mr Sarkozy would also be writing to the Canadian Prime Minister, Stephen Harper, to urge more action on financial market regulation.

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