* Shape of euro zone fiscal union up for grabs
* Transfer of sovereignty sticking point for France
* Germany wary of asking its taxpayers to do more
By Alan Wheatley, Global Economics Correspondent
LONDON, July 3 (Reuters) – It’s 2025 and Angela Merkel,
Europe’s first democratically elected president, is reviewing a
crowded agenda for the new session of the increasingly powerful
European Parliament.
The head of the European Monetary Fund is recommending a big
increase in the by now well-established financial transactions
and carbon taxes to fund emergency transfers from Brussels to
the European Union’s new Balkan members.
Merkel must also overcome lingering opposition to her
proposal to re-admit Greece to the euro, 12 years after Athens
pulled out of the single currency because of popular unrest over
the austerity measures she had championed as German chancellor.
The ensuing financial cataclysm and economic depression
galvanised the euro’s remaining members to seek shelter in what
many had dismissed as unthinkable – full political and fiscal
union.
If that scenario sounds far-fetched, then so does the
“vision statement” prepared by four EU presidents, the bloc’s
most senior officials, for last week’s EU summit.
The paper, co-authored by European Council President Herman
Van Rompuy and European Central Bank President Mario Draghi,
said the euro zone should push ahead with a banking union and a
budgetary union, possibly leading to the creation of a treasury
office that could issue common debt. [ID: nL6E8HQ32K]
Critically, they added, for the plan to succeed Europe’s
voters must rally behind such a surrender of sovereignty. The
summit tasked Van Rompuy to deliver by the end of the year a
firm timetable for fiscal union.
In Portugal, which has already had to accept strict external
supervision of its budget as the price of a 78 billion euro
bailout, some regard the prospect of handing greater fiscal
power to Brussels as a natural evolution.
“I would be very happy to pay my taxes to a European entity
as long as those who are managing that money have more
democratic legitimacy,” said Francisco Alves da Silva, 27, a
mergers and acquisitions consultant in Lisbon.
That legitimacy could come via much greater sway for the
European parliament or even from the direct election of the
president of the European Commission, the EU’s executive arm
currently headed by Jose Manuel Barroso.
What da Silva does not want to see is decision-making for
the whole of Europe stitched up in back-room deals between
Germany and France.
GERMANY VS FRANCE
Like it or not, though, the scale and speed of further euro
zone integration will largely come down to Berlin and Paris,
Europe’s two traditional heavyweights, and whether they can
reconcile their radically different concepts of “more Europe”.
Germany, the EU’s main paymaster, refuses to countenance
common debt issuance to placate bond markets until other member
states with weaker finances have surrendered a large degree of
control over their budgets and economic policy to Brussels.
For its part, France insists that “solidarity” – getting
Germany to share responsibility for debt issuance – must precede
any dilution of sovereignty.
Can the circle be squared?
The outcome of the summit offered cautious grounds for
optimism. In what many saw as a major concession by Germany,
Merkel agreed to let the euro zone’s rescue fund inject funds
directly into stricken banks from next year and intervene in
bond markets to support troubled member states.
“The art of German-French friendship is to be conscious of
each other’s different interests,” said Thomas Silberhorn, a
parliamentarian for the Christian Socialist Union, the Bavarian
sister party of Merkel’s Christian Democrats.
But, speaking at a pre-summit meeting in London of the Open
Europe think tank, Silberhorn said mutual aid had its limits: he
echoed Merkel’s mantra that underwriting common euro bonds would
be too much of a burden even for Europe’s mightiest economy.
“Germany will keep solidarity but we will have to reject the
appeal for selflessness,” he said.
In contrast to Germany’s federal model of government, which
makes it more natural for Berlin to cede fiscal authority,
France cherishes a strong central state and is loath to see the
responsibilities of the parliament in Paris pass to Brussels.
But France has been losing economic ground to Germany,
diluting its influence in the integration debate.
“It is still too strong to accept further loss of
sovereignty, but it is too weak to offer a clear and meaningful
alternative,” said Marc Chandler, global head of currency
strategy at Brown Brothers Harriman.
ON BOARD
Jean-Dominique Giuliani, president of the Fondation Robert
Schuman, a pro-European think tank in Paris, saw no political
willingness in France in the short term to bow to Germany’s
demands for a transfer of power. For a start, both main parties
studiously avoided the issue during France’s just-concluded
presidential and parliamentary elections.
But he said the ruling Socialist party of President Francois
Hollande was likely to ratify the EU’s fiscal compact, signed by
his conservative predecessor, Nicolas Sarkozy, which requires
strict adherence to debt and deficit limits on pain of
sanctions.
That might be awkward to explain for Hollande, who
campaigned on a pro-growth platform, and so provoke a backlash
from sovereignists in his own party as well as from radical
parties on the left and the right, including the eurosceptic
National Front.
But it would leave France’s two main political groupings in
favour of greater integration, Giuliani said.
“And with the economic situation quickly getting worse in
France, I think it will become urgent to push on towards steps
that involve sharing sovereignty, notably on the budget,” he
said.
As for Germany’s opposition to euro bonds, Giuliani said the
euro zone’s extension of hundreds of billions of euros in loans
and guarantees to bail out Greece, Ireland and Portugal, and now
Spain and Cyprus, already constituted a mutualisation of
liabilities.
Michael Heise, chief economist at German insurer Allianz,
agreed that the bailouts represented debt pooling on a massive
scale. ‘If something goes wrong, for example if Greece exits the
euro zone, it won’t just be Germany that is hit,” he said.
This was all the more of a reason to make sure the euro was
solidly underpinned by requiring central oversight of members’
budgets, Heise said, in another echo of Merkel’s views.
“When we’ve achieved that, the path towards some
mutualisation of debt – euro bills or something of that type –
will probably take place. But that’s the right procedure and
sequence for going forward,” Heise said.
HIGH STAKES
By proposing direct aid to banks, leaders took what could
turn out to be a crucial step towards severing the dangerous
link between weak lenders and their over-indebted sovereigns.
They hope to work out how the ECB will supervise big
cross-border banks, the first pillar of a mooted banking union,
by the end of the year.
That is also the deadline Van Rompuy has been given to come
up with a firm timetable for implementing the four presidents’
vision. With the euro’s current architecture in effect declared
unfit for purpose, impatient markets will want to know exactly
what the euro zone means by fiscal union and when to expect it.
“It’s still a good distance off, but it has to be done in
order to make real progress,” said Niels Thygesen, an economics
professor at the University of Copenhagen and a member of the
committee headed by former European Commission President Jacques
Delors that designed the single currency in the late 1980s.
“There’s no solution in breaking up the euro area,” he
added. “The consequences of that are so inferior that it cannot
be contemplated, be it by the strong or the weak. We should
discard that completely.”
(Additional reporting by Daniel Alvarenga in Lisbon; editing by
Janet McBride)
