Europe attempts move to fiscal union

Sarah Davidson

December 2, 2011

German Chancellor Angela Merkel told the Bundestag that a new EU treaty was needed to sort out failing economies and get their budgets back on track.

She said European tax and spending policies in member states must have closer integration and that Brussels should have more power to penalise countries that fail to comply.

“We need budget discipline and effective crisis management mechanism,” she said. “So we need to change the treaties or create new treaties.”

Her calls come hot on the heels of European Central Bank chief Mario Draghi warning European leaders must achieve a “fiscal compact” so the ECB can start sorting troubled countries out.

Speaking to the European parliament yesterday Draghi said binding governments to public finance rules is the most important part of restoring credibility to financial markets.

He said: “We have observed serious credit tightening … which, combined with a weakening in the business cycle, does not bode at all well for the months to come.

“The most important thing for the ECB is to repair the credit channel.”

Most commentators agree the ECB must start quantitative easing by issuing Eurobonds backed by all member states to calm markets.

But Germany has so far refused this route with many claiming they fear a return to hyperinflation.

French President Nicolas Sarkozy has also called for EU treaty changes and is due to meet Merkel on Monday next week.

The talks are ahead of a European summit on 9 December, seen by many as the make or break deadline for the single currency.

But there are fears that any significant changes to European treaties could take months if not years to thrash out.

Earlier this week Olli Rehn, the European Commissioner for Economic and Financial Affairs, said: “We are now entering the critical period of 10 days to complete and conclude the crisis response of the EU.”

Yesterday Mervyn King, governor of the Bank of England, warned on the UK economy’s prospects and said the Bank was looking at the potential break-up of the euro.

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