German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis.
Stocks and the euro rose after Merkel and Sarkozy said that Europe’s two biggest economies were aligned on backing automatic penalties for deficit violators and locking limits on debt into euro states’ constitutions. The French leader said they aimed to reach consensus on the changes required by March.
“We don’t have time -- we are conscious of the gravity of the situation,” Sarkozy said after the two met over lunch at the Elysee palace in Paris today. “We want to go as fast as possible based on this agreement between France and Germany, which is open to others.”
With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year. Among the French-German measures were plans to fast-track the permanent rescue fund to 2012, one year earlier than originally envisaged.
While the announcements represent “a good start to the week of truth,” Merkel and Sarkozy still need to convince the rest of the euro area to go along with their plans for closer union if they are to prompt European Central Bank President Mario Draghi to step up the ECB’s response to the crisis, said Carsten Brzeski, an economist at ING Group in Brussels.
“They need put money where their mouth is and bring everyone else on board,” Brzeski said by phone. “From a financial market perspective, it’s about them doing enough to deliver Draghi’s fiscal compact.”
Merkel and Sarkozy both declined to comment today on Draghi’s comments last week that “other elements might follow” should a “new fiscal compact” emerge among the euro nations.
Safeguarding banks, limiting the damage to Italy and Spain and finding additional rescue funds may hinge on the response to Franco-German demands for closer economic integration and tougher policing of fiscal rules.
The euro advanced, extending last week’s gains versus the dollar, climbing 0.3 percent to $1.3429 at 4:59 p.m. Frankfurt, while the Dow Jones Industrial Average climbed 1.2 percent to 144.29 points at 11:01 a.m. in New York.
The risk premium between Italian and German 10-year notes narrowed 79 basis points to 3.73 percentage points.
With the EU summit looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt tomorrow to prod political leaders, and the ECB holds a policy meeting Dec. 8.
European leaders will seek to “win back a bit of trust” at a summit after “our reliability has suffered,” Merkel said. “We are steadfastly determined to make the decision at the council now.”
The two repeated their rejection of jointly sold euro bonds in solving the crisis and affirmed the independence of the ECB.
“I want to tell French people that France and Germany totally oppose euro bonds because it isn’t at all a solution in this crisis,” Sarkozy said. “What a strange idea to put European debts in the same pot.”
Merkel also sought to calm concerns of euro-area member states that the European Court of Justice would be able to veto national budgets as part of a proposal for centralized deficit supervision.
“The European court won’t be able to check every budget, but rather rule on whether the debt brake anchored in national law has been implemented in such a way that it adheres to the Stability and Growth Pact,” Merkel said.