Wed Aug 17th, 2011 at 04:17:31 AM EST
According to EUObserver.com: Merkel and Sarkozy plan 'true economic government'
Following the two-hour talks in Paris, President Nicolas Sarkozy and Chancellor Angela Merkel said they would work towards a common corporation tax by 2013 and to co-ordinate their annual national budgets.Update [2011-8-18 4:21:25 by Migeru]:
More generally, they suggested eurozone leaders should meet twice a year and that all single currency countries should enact constitutional changes requiring balanced budgets.
The two leaders pledged to revive the idea of a financial transaction tax - a proposal that has been regularly mentioned in Brussels in recent months but has failed to get traction among member states.
The two measures that many analysts believe will help ease the eurozone's debt crisis - the issuance of eurobonds and increasing the size of the eurozone's 440 billion rescue fund - were not on the table, however.
The letter from Markel and Sarkozy to van Rompuy has now been made public. here
[PDF] is the copy hosted by ElPais.com
In other words:
- corporate tax harmonization
- replacing the Eurogroup with a summit of the heads of government (currently the Eurogroup is a meeting of finance ministers of Euro countries - therefore a subset of the Ecofin, the configuration of the European Council in which the economy and finance ministers of the whole EU meet)
- constitutional balanced budget amendments
- a Tobin tax
- no Eurobonds
- no expansion of the EFSF
- and 4. are positive but won't solve the crisis nor prevent a new one from arising after the next business cycle;
- is neutral. It just reflects Merkel and Sarkozy's annoyance at Juncker and Merkel's disagreements with Schäuble. It may not be such a a good idea to take the finance ministers out of the Eurogroup, but who knows. In any case, despite the hype this is all there is to the "true economic government" being ushered in: the heads of government of the Euro will meet together rather than their finance ministers;
- is also neutral because, as currently configured, the EFSF is not part of the solution to the crisis;
- is neutral because Eurobonds are not the only way out of the sovereign insolvency crisis: there's also sovereign default;
- is an absolute disaster;
I'll just quote Wolfgang Münchau's FT column from 2 years ago: Berlin weaves a deficit hair-shirt for us all
(21 June 2009)
A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.
Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case [Germany fails to return to pre-crisis levels of growth by 2011], the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case [Germany returns to pre-crisis levels of growth by 2011], economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany's lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.
What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.
For a discussion of why (or why not - a position also articulated there) balanced government budgets imply zero sovereign debt, and consequently monetary deflation, in the long term see this recent thread here on ET.