Franco-German deal requires a revamped European treaty
Major climbdown by Chancellor Merkel as new bailout rules won't force losses on bondholders after 2013
THE leaders of France and Germany will propose a new European treaty, with sweeping changes to the way the European Union (EU) is run.
The eurozone's big two seem to have decided that the Brussels meeting at the end of the week will be nothing more than a rubber-stamping exercise for a fait accompli.
Angela Merkel and Nicolas Sarkozy announced yesterday in Paris that they had reached an agreement on how to stabilise the eurozone.
It would seem that the job for the rest of Europe's leaders on Friday is simply to turn up and approve what the French President and the German Chancellor have cooked up.
French President Nicolas Sarkozy and Germany's Angela Merkel want a new EU treaty that binds all countries to tough new budget rules, in order to prevent overspending in future.
The deal seems to bear a deeper German, rather than French, stamp.
However, in a major climb-down, the German Chancellor said that the new bailout rules would not force losses on the bondholders that lend money to countries before they get into difficulty.
In June last year when the permanent bailout mechanism was created, Germany insisted on the clause to include losses for bondholders in any bailout from 2013.
This has now been dramatically withdrawn from the new deal to be announced on Friday.
This is good news for Irish plans to get back into the money markets, because it lifts a major fear for private sector lenders.
Many in the markets blame the clause for the subsequent deterioration in bond investor confidence that led to bailouts for Ireland and Portugal.
Treaty changes of the scale being discussed would need a referendum in Ireland in order to be ratified. That process could take months, or even years.
A spokesman for the Government said Irish leaders believed the current crisis needed to be dealt with immediately. He said plans for treaty changes didn't do that.
However, Taoiseach Enda Kenny in his state-of-the-nation address on Sunday night accepted the logic of closer economic integration that lies behind the French and German proposal.
The new treaty outlined by Germany and France yesterday would include all countries introducing a constitutional ban on over-spending.
Countries that break the rules could be taken to the European Court of Justice.
There would be automatic sanctions against states that breached an existing deficit limit, unless a supermajority of states voted against the penalty.
That would reverse the current system where a majority of states must vote to launch disciplinary procedure.
Yesterday, Mr Sarkozy and Ms Merkel called for the early launch of a permanent bailout fund for euro states in distress.
"What we want is to tell the world that in Europe the rule is that we pay back our debts, reduce our deficits, restore growth," Mr Sarkozy said
Confidence that European leaders will come up with a credible plan to lead the region out of its debt crisis at this week's summit lifted world stocks yesterday, with European shares hitting a five-week high.
In the bond markets hopes that a deal will be done led to a sharp fall in borrowing costs.
Investors and policymakers hope a summit deal on closer eurozone integration combined with strict deficit reduction measures by heavily indebted states will induce the European Central Bank to act decisively to stop contagion on bond markets.
Yesterday, Mr Sarkozy and Ms Merkel said they would send off their plan to European Council President Herman Von Rompuy tomorrow, in time for a make-or-break European Union summit on Friday.
They said they wanted all 27 EU members to sign up to the new treaty, but threatened to press ahead with a deal among the 17 euro members if the likes of the UK scupper that hope. (Additional reporting Reuters)