GERMANY AND FRANCE ROLL OUT PLAN TO BOOST EURO / THE NEW YORK TIMES ( HIGHLY RECOMMENDED READING )

February 4, 2011


Germany and France Roll Out Plan to Boost Euro

By STEPHEN CASTLE

BRUSSELS — Initiating a bold effort to strengthen the euro, Germany and France on Friday laid down far-reaching plans to deepen integration among the 17 nations that use the currency. The move prompted immediate opposition, but could lead to embryonic economic government for Europe.


After days of speculation, the proposal from the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, was greeted with criticism from governments that fear they may have to raise corporate tax rates or scrap deals that link annual wage increases to inflation.


At a European Union summit meeting in Brussels, several prime ministers from euro-zone countries, including Belgium’s caretaker premier, Yves Leterme, criticized the proposal or questioned the way it would operate. Non-euro nations, including Poland, expressed fears they could be sidelined.


Mr. Sarkozy, reacting to the opposition from nations, including Ireland, over taxation, said that the aim was “not to impose the same thing on everyone.” Friday’s objective, he added, was not a detailed agreement but to reach a consensus on a desire “for a pact, economic government and convergence.”


The strength of the reaction underlines how high the stakes are. Analysts said that the Franco-German move potentially marked an important turning point, one that could lead to the euro nations agreeing on more of their key economic policies in a unified bloc.


Berlin, which once opposed the idea of greater decision-making among euro-zone leaders, now wants to make it a central part of a package of measures to be agreed upon in March. These will also strengthen the rescue fund for the euro zone by allowing it to lend its full, €440-billion ceiling figure, and perhaps use its funds more flexibly.


In exchange for bolstering the fund, Berlin hopes to use the new “pact for competitiveness” to force weaker euro-zone economies to mirror Germany’s more disciplined example.


Standing side by side, Mrs. Merkel and Mr. Sarkozy appeared to have reached the conclusion of many critics of the single currency who argue that the financial crisis exposed a flaw in the design of the euro by creating monetary union without either economic convergence or political union.


Under the plans outlined Friday, the leaders of euro zone will meet in March to draw up a blueprint for closer coordination of economic policy, a strategy that the remaining 10 E.U. nations would later be given the option of adhering to, Mrs. Merkel said.


“The E.U. — but above all those countries that use the euro — wants to grow together,” Mrs. Merkel said. “Politically we will grow step-by-step closer together.”


If other countries can be persuaded to go along, the initiative could lead to the fulfillment of a long-standing French demand for a stronger leadership of the euro zone, presided over by regular meetings of their leaders.


In exchange, however, Berlin laid down a series of criteria by which competitiveness would be judged, and which would be designed to bring other economies closer to the standards of competitiveness achieved by Germany, which has emerged from the financial crisis as Europe’s economic lodestar.


“I think we are seeing the beginning of a euro group which could become a more important organization politically as well as economically,” said Charles Grant, director of the Center for European Reform. “France has long wanted the euro zone to be on a basis that made it more important and the Germans have now accepted that logic.”


The criteria identified in a German policy paper that circulated before the summit meeting included abolition of wage indexation systems, creation of a common base for assessing corporate tax, alignment of pension system and legally binding commitments to tough fiscal policies.


The approach is controversial because it touches some of the most sensitive areas of policy — like taxation and wage policy — where many nations guard their sovereignty jealously.


“I totally disagree with the current proposals,” Mr. Leterme of Belgium said. “We will not let the cornerstones of this system be undermined.”


Belgium argues that its system of wage indexation has not delivered higher inflation than Germany.


Reservations even emerged from neighboring Holland, where the government generally supports Germany on economic policy.


“We welcome stronger economic coordination on the basis of best practices, but we will always remain the master of our taxes, pensions and wages,” said the Dutch prime minister, Mark Rutte.


The range of complaints from within the euro zone alone reflects how difficult it will be to make the pact work.


Ireland sees its low rate of corporate tax as one of its few weapons in the battle to revive an economy so badly battered by the crisis that it accepted a bailout last year. Estonia and Slovakia also want to protect their low tax regimes.

But France and German politicians have long complained at being undercut by the E.U. nations with lower corporate tax.


Some countries also dislike the fact that the new structure would be orchestrated by governments, rather than the bloc’s executive, the European Commission, which is seen by many smaller nations as a protector of their interests.


Many issues remain to be resolved, including how the new group would operate, how its rules would be enforced, and whether nations that do not use the euro — like Britain, Poland or Sweden — would want to join and be invited to join in.