France, Germany lay out proposals to solve crisis

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French President Nicolas Sarkozy and German Chancellor Angela Merkel Wednesday submitted a letter to European Union (EU) President Herman Van Rompuy, detailing actions needed to surmount the current debt crisis.

In their joint proposals, measures including treaty changes, institutional set-up, tighter budget oversight as well as the establishment of a permanent rescue mechanism were presented as viable means to stem the eurozone debt crisis.

Treaty changes by March

In their joint letter to Van Rompuy, the two leaders said that the current crisis "has mercilessly uncovered the deficiencies in the construction of economic and monetary union."

To fix the problems, they suggested more binding and ambitious fiscal rules which should be enshrined in the European treaties to facilitate the integration of the single currency bloc.

The two leaders also voiced the hope that European leaders make decisions as soon as possible so that a new treaty would be put in place by March. If all 27 EU members failed to agree to the treaty, the 17 euro countries would press ahead on their own.

Strengthened institutional set-up

Beyond treaty changes, the Franco-German letter also suggested introducing a more integrated and efficient institutional set-up to put the governance of the euro on a sounder footing.

The institutional set-up includes regular summits, at least twice a year, to map out the common economic and fiscal policies in the eurozone without hurting each country's national interests.

"During the crisis, the Euro summit should meet on a monthly basis: each meeting should focus on a precise agenda regarding governance and policies to foster growth, competitiveness and fiscal stability," they said in the letter.

Other suggestions include more frequent ministerial meetings and a reinforced preparatory mechanism to ease the implementation of decisions made at EU summits.

Tougher budget discipline

The two leaders said the current crisis stemmed partly from the absence of penalties on countries that breach budget discipline.

To secure future fiscal discipline, the two leaders proposed automatic penalties on any eurozone country whose budget deficit exceeds 3 percent of its Gross Domestic Product (GDP).

Moreover, a comprehensive preventive framework is also needed to strengthen supervision and incentives to maintain fiscal discipline in the eurozone, they said.

Under the framework, each eurozone country should enshrine the objectives and requirements of the Stability and Growth Pact on a balanced budget into national legislation.

Permanent rescue mechanism

Sarkozy and Merkel also agreed to implement the European Stability Mechanism (ESM) one year early in 2012.

To ensure a broader remit and more efficient functioning of the bailout mechanism, the joint proposal incorporates a simplified decision-making procedure: decisions made by majority votes instead of unanimity.

Concerning private-sector involvement in the rescue fund, the two leaders said that the ESM treaty should be modified to make clear that a 50-percent write-down of the Greek debt is an exception, and that in the future, all eurozone countries must make the commitment to repay debts on their own.

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