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December 07, 2011

Germany, France begin to scale back ambitions of summit

German and French officials lowered expectations Wednesday for a deal to save the euro during this week's European summit, deflating investors' optimism about a broad resolution of Europe's debt crisis.

Instead of a new treaty among the 27 members of the European Union, a French official suggested a more likely outcome will be an accord by the 17 nations that use the euro. And a German official said reaching a deal might take until Christmas.



The senior French official said Paris expects to strike a deal with at least the eurozone's 17 members — and others who want to join voluntarily — by Friday night.

Certain provisions in the Franco-German proposal, such as setting automatic penalties for countries that overspend, are controversial and have the potential to delay an agreement.

The 10 EU countries that do not use the euro are concerned that they'll be left out of future economic discussions that would affect all of Europe, although Germany has insisted that any interested countries would be welcome to adopt the changes of the eurozone 17.

British leader David Cameron is wary of losing influence within the 27-nation bloc if France and Germany create a tighter club of eurozone nations. His government also does not want to transfer any of its decision-making powers to Brussels.

The proposals floated by the German and French leaders are based on several key issues:

- Having all 17 countries that use the euro amend their constitutions to require balanced budgets.

- Using EU institutions such as the European Commission to enforce penalties for countries that run excessive budget deficits. The use of those institutions might require that all 27 EU countries agree to it.

- Trying increase further the EU's financial ability to bail out countries.

- Pledging that any future bailouts would not require private bond investors to absorb part of the costs, as was the case for the Greek bailout.

- Finally, the proposal seeks to streamline the 17-nation currency's future $669 billion permanent bailout fund by suggesting that a majority of countries holding 85% of the ECB's capital should be sufficient to make all decisions. That would give the bloc's six biggest economies the power to outvote the remaining 11 nations, a move that is likely to run into fierce opposition from smaller countries.

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