Sarkozy and Merkel Meet Monday to ‘Guarantee the Future of Europe’

French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Paris on Monday under pressure to align their positions on centralizing control of euro zone budgets to stem a debt crisis that threatens Europe’s currency union.

Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France will meet Monday to try and work out a proposal on the currency crisis that they can present together. Photo: France Diplomatie

European leaders are working overtime on a tentative deal to try to save the euro, which they hope to complete at a crucial summit meeting in Brussels this week.

After individually outlining their views last week on closer fiscal integration, the two leaders must overcome remaining differences to fine tune proposals they want to present to EU leaders in Brussels on Thursday, on the eve of a summit.

The emerging solution is being negotiated under great pressure from the markets, the banks, the voters and the Obama administration, which wants an end to the uncertainty about the euro that is dragging down the global economy.

European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The duo, increasingly dubbed “Merkozy” as they intensify bilateral efforts to restore confidence in the euro zone, will meet over lunch at 1:30 p.m. (1230 GMT) on Monday and are expected to hold a news conference afterwards.

“We need profound treaty modifications,” French government spokeswoman Valerie Pecresse told France Inter radio, but stressed the idea was to give euro zone governments the final say on applying any punitive sanctions proposed by the European Commission for fiscal slackers.

Sarkozy said last week he would meet Merkel to make “French-German propositions” that will help “guarantee the future of Europe.” The two heads of state are due to meet in Paris at 1:30 p.m. tomorrow for a “work lunch,” according to the Elysee presidential palace’s website.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

“The survival of the euro zone is in play,” one senior European official said. “So far it’s been too little, too late.”

The sticking point is that France opposes Germany’s push to have euro states surrender budgetary control to a European authority with veto power.

While Germany, fed up with costly bailouts, wants a more federal EU system, Sarkozy is under fire five months from a presidential election from political rivals who accuse him of being ready to hand over sovereignty to unelected EU officials.

French President Nicolas Sarkozy and German Chancellor Angela Merkel may not reach an agreement on proposals to overhaul European institutions tomorrow, Le Journal du Dimanche reported, without saying where it got the information.

The Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts.

Mrs. Merkel is also dead-set for now against collective debt instruments, like “eurobonds,” that would put taxpayers, particularly German ones, on the hook for the debt of others, which her government regards as illegal.

Nicolas Sarkozy and other European leaders are working on a more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.

Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules.

Sources close to Merkel have also said that depending how this week’s talks go, she could overrule hostility from the Bundesbank and support the ECB stepping up its debt purchases from troubled euro states as a short-term bridging measure.

Markets rallied last week after central banks moved to help European banks and on hopes of a Franco-German masterplan. ECB chief Mario Draghi signaled that a euro zone “fiscal compact” could nudge the bank to act more decisively to fight the crisis.

As crucial as this summit meeting will be for market confidence, Mrs. Merkel loves to repeat, “There is no magic wand” or “single act” to solve the euro crisis. As she told German lawmakers last week, “It is a long process, and that process will take years.” [via Reuters, The New York Times and Bloomberg Business Week]

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