Merkel and Sarkozy unite to flesh out new plan for rescuing euro
German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet for the first time this year to forge a joint position as they embark on a race to carve out a master plan to rescue the euro over the next three months.
The two leaders meet in Berlin today to flesh out a new rulebook for fiscal discipline, negotiated at a December 9 summit, which seeks to create a "fiscal compact" for the 17-member euro area.
The German and French leaders have sponsored a plan to install new guidelines by March. A crisis that began in Greece two years ago has moved to the euro-area's core and leaders are struggling to convince investors they can contain the risk and assure the euro's survival.
The euro, which posted a second consecutive annual loss to the dollar in 2011, has extended the decline and dropped 1.7pc so far this year. The currency lost 9.4pc in the last six months.
Borrowing costs for sovereign debt also increased. Spanish 10-year yields rose by the most in almost 17 years last week, leading bonds of the region's most-indebted countries lower, on concern that they will struggle to cut budget deficits amid the economic slowdown.
Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence.
The meeting will be followed by a round of talks among euro-area leaders before the next summit meeting in Brussels on January 30. Italian Prime Minister Mario Monti will also visit Berlin this week and Mr Sarkozy and Ms Merkel will both travel to Rome on January 20 for negotiations with the Italian government.
Assembling the fiscal compact, which anchors debt limits into national constitutions and speeds up sanctions for violators, will entail creating a framework for euro members and other European Union states to draw up rules among themselves.
The refusal by Britain to participate in a plan to alter EU treaties could complicate efforts by euro area governments seeking to use EU institutions to police any new debt scheme.
Europe was "slowly but surely" mastering the debt crisis, even if a solution had taken longer than hoped, European Union President Herman Van Rompuy said.
"We'll put this crisis behind us, but it has taken longer than we hoped for," he added.
Europe's newfound powers over national taxing and spending face a first test this week when the European Commission prods Belgium to make deeper savings just a week into the budget year.
The commission will decide on Wednesday whether an emergency Belgian spending freeze is enough to put the deficit on track to fall below euro-area limits in 2012. A negative verdict would expose Belgium to potential sanctions in a precedent-setting trial of rules.
Among the various moving parts in planning to resolve the crisis are Greek negotiations with bondholders to cut the country's debt load in half. Olivier Blanchard, the IMF's chief economist, said last week that debt reduction for Greece "could have to be larger" and the numbers would have to be worked out.
The two leaders may also discuss funding for the European bailout fund. Opposition by Germany to increasing the so-called firewall for struggling states was underscored last week, with German lawmakers expressing their resistance to raising the €500bn ceiling for the permanent European Stability Mechanism, scheduled to go into effect this year. (Bloomberg)