Sarkozy And Merkel Announce Complete Agreement, Propose New EU Treaty

12/05/2011 19:27

BI:  French President Nicolas Sarkozy and German Chancellor Angela Merkel just finished a press conference on treaty changes that they hope will fix the big problems that threaten to tear the eurozone apart.

While they really didn't say anything unexpected, markets jumped and the Dow shot up more than 150 points.

Perhaps the biggest development is the fact that this treaty could go ahead with just the approval of the 17 eurozone countries, rather than the entirety of the 27-country EU. This could speed approval of the new treaty, but also provoke conflict between the 17 countries that use the euro and the 10 that do not.

Here are the main points of other things they're planning to do, that will be summed up in a final treaty outline by March 2012:

    Impose restrictions on the size of deficits and spending for governments.

    Involve the European Court of Justice in the oversight of budget commitments. They'll have the power to oversee and determine when other EU countries can impose sanctions, but they won't have the ability to veto budgets directly.

    Speed up implementation of the European Stability Mechanism to next year.

    Eurobonds, at least before treaty change, are not a solution. They said little about the European Central Bank.

    Measures to address the current status of the crisis will be announced at the EU summit on Friday.

Merkel and Sarkozy have not presented a short-term solution to the European crisis, but they do appear to be making strides towards rectifying the fundamental problems that led to the crisis in the first place.

However, just because Merkel and Sarkozy say they've have reached complete agreement on a new treaty does not mean that these moves are legal. Giving the European Court of Justice the power to enforce sanctions but not veto budgets altogether may sidestep a German Constitutional Court ruling that prohibits the central EU government from compromising the sovereignty of the German government, however a permanent European Stability Mechanism still seems to violate the central tenets of the German constitution.

Further, passage of these measures would essentially condemn a country like Italy to years of misery. Even if it agreed to go along with the plan in the short-term, years of austerity and recession could compromise their commitment to the union in the long-term.

What's also clear is that Merkel is still wearing the pants in the Franco-German relationship. She's been at the forefront of talk about treaty changes, and Sarkozy seems to be following her lead here. Sarkozy will need to take a tougher stand against his German counterpart in demanding more radical action by the ECB at the EU summit on Friday if he and the rest of Europe have any hope of mitigating the crisis in the short term.

Regardless of the strides made today, the question now is still whether EU leaders can take adequate measures to stem the tide of the crisis in the short run. While their long-term plan may be solid and achievable, markets continue to speculate against the fragile Italy and Spain. Unless we get some stronger commitment to keeping the euro plan afloat, the ship might sink before we can even get to March.

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