French and German Officials Explore Idea of Smaller Euro Zone

Reuters reported yesterday that discussions among policy makers in Berlin, Paris and Brussels have raised the possibility of one or more country leaving the euro area, citing officials.

German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources said Reuters. Photo: The Politics Walrus/Flickr

French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe — the euro zone moving ahead more rapidly than all 27 countries in the EU — was the only model for the future.

“France and Germany have had intense consultations on this issue over the last months, at all levels,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

“We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part,” the official said.

A French government official said there are no plans to shrink the 17-nation euro region, denying a Reuters report.

“There have been no conversations between French and German authorities at any level on decreasing the size of the euro zone,” a French finance ministry spokesman said.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-region finance ministers, told reporters in Lisbon late yesterday that the euro area should stay together and it is “not time for us to subdivide into national categories.”

The German Finance Ministry, in a statement e-mailed late yesterday responding to the Reuters report, said that on Oct. 26 euro-area leaders asked European Union President Herman van Rompuy, European Commission President Jose Barroso and Juncker to present them with an interim report “including a time frame for the further strengthening of the euro zone.”

The report, to be presented at their next meeting in December, should include “the question of possible treaty changes,” the ministry said.

“This discussion is to be continued in March 2012 in a report on how these treaty changes can be implemented,” the ministry said. “This is being worked on. All rumors going beyond this are unfounded and wrong.”

The escalating crisis prompted European Commission President Jose Manuel Barroso to issue a stern warning of the dangers of splitting the zone. EU sources told Reuters French and German officials had held discussions on just such a move.

“There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East,” Barroso said.

“It is time for a breakthrough to a new Europe,” German Chancellor Angela Merkel said. “A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can’t survive.”

Speaking in Berlin, Merkel reiterated a call for changes to be made to the EU treaty — the laws which govern the European Union — saying the situation was now so unpleasant that a rapid breakthrough was needed.

France and Germany see themselves as the backbone of the euro zone and frequently promote initiatives that other euro zone countries reject. The idea of a core, pared-down euro zone is likely to be strongly opposed by the Netherlands and possibly Austria, although both would be potential members.

“This sort of thinking is not the direction we want to go in. We want to keep the euro zone as it is,” said a non Franco-German euro zone diplomat.

At the same time, policymakers outside the euro area kept up pressure for more decisive action to stop the crisis spreading.

Christine Lagarde, head of the International Monetary Fund, told a financial forum in Beijing that Europe’s debt crisis risked plunging the global economy into a Japan-style “lost decade.”

“If we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand.” [via Reuters and Bloomberg]

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