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What DoesEurope Want?

THE WHO AND HOW OFRESOLVING THE EURO CRISIS

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INTRODUCTIONThe decisions facing Europe’s leaders and institutions in 2012 are nothing less than colossal. Attempts at the end of last year

to cobble together a “comprehensive solution” culminated in the December 8-9, 2011 European Council summit started a

process that will consume the continent for most of 2012. But questions remain as to the true nature of the crisis, how the EU

can prevent a potential slide in the value of the euro and shore up Greece, and if a lumbering treaty-ratification process can

get ahead of market’s expectations and fears. French and German leaders have stated repeatedly that a new treaty is a major

step towards fiscal union. However, a sober analysis of the proposed measures in the treaty indicates that many of them came

into existence by way of crisis-management policy in 2010 and early 2011.

This piece attempts to dissect the anatomy of the eurozone’s diffuse and often vexing decision-making process to determine:

What does Europe want?

The paper’s first section provides an analytical snapshot of the four main players in crisis decision-making: Germany,

the European Central Bank (ECB), France and the European Commission. These four actors are and will be essential for

the passage and implementation of policy instruments intended to pull Europe out of the crisis. This section is not a

comprehensive analysis of all actors – governmental or private – that can impact political outcomes in the EU. It is rather

an attempt to capture players and policies that stand out in the debate on the eurozone’s short- and long-term future. The

first part begins with an examination of Germany, the country at the heart of the eurozone, and the dynamics that drive the

reluctant hegemon’s actions. It then looks at the ECB, the EU’s only credibly independent institution, which continues to be

the only player with the latent power to bring immediate relief single-handedly. But the bank is plagued by treaty restrictions

and internal ideological conflicts that impair its ability to act. The third part of this section delves into France’s role in bridging

the gap between Europe’s two ideological factions while managing its own internal debate. A fourth and final part considers

the Commission, which entered the crisis as a weakened institution but retains a role as the nucleus of some of the central

questions about the future of fiscal and economic union. As such, the Commission has staked out stronger positions in the

past two years.

The second section examines policy proposals that have emerged or are under consideration by eurozone leaders. These

options range from short-term instruments, such as re-capitalizing banks, to the longer-term re-wiring of the EU’s basic

economic governance. Other policies under review include the depth of European integration and the possible introduction

of mutualized eurozone debt. Debates on all these issues could involve new agreements or treaty revisions.

This publication was assembled by the Bertelsmann Foundation North America based on interviews and research conducted

in Europe and Washington, DC. This text was originally released on the eve of the December 2011 EU summit in Brussels and

has since been updated to reflect the outcome of that gathering. Readers should note that events surrounding the eurozone

crisis are changing rapidly.

This text is primarily meant as a primer for a US audience looking for better understanding and greater transparency of a

highly complex, fast-moving issue that has become the most important challenge on America’s foreign-policy agenda.

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What Does Europe Want?THE WHO AND HOW OF RESOLVING THE EURO CRISIS

Annette Heuser Executive Director

Meghan Kelly Project Manager, Transatlantic Relations

Tyson Barker Director, Transatlantic Relations

Christopher Wiley Program Associate, Transatlantic Relations

INTR

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January 18, 2012

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TABLE OF CONTENTS

The Main Players Germany 4

The European Central Bank 7

France 9

The European Commission 11

The Policies The European Financial Stability Facility 13

Bank Recapitalization 15

Economic Governance 16

The European Semester 17

The Euro Plus Pact 18

The Six Pack Measures 19

Fiscal Union 21

Eurobonds: Mutualization of Sovereign Debt 23

Conclusion 25

Annex I The United Kingdom 26

Annex IITimeline of Major Decisions Taken to Resolve the Eurozone Crisis 28

Endnotes 30

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What Does Europe Want? The Who and How of Resolving the Euro Crisis

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GERMANY

Germany is seen by many countries, including its European

allies, as a sphinx. Its role thus far in the eurozone crisis is

seen as a testament to the county’s continued ambivalence

to European leadership as no clear vision for restoring

eurozone confidence has emerged from Berlin. Germany’s

focus has instead been on the desire to position itself as

the “guardian of financial stability and budget discipline” in

Europe.1 In the midst of the eurozone crisis, the governing

coalition’s response has been to champion a mélange

of measures, such as austerity cuts, privatization and

pension reforms, on the less competitive member states in

Europe’s periphery, particularly Greece. Berlin has shown

great reluctance to act in any way that could take pressure

off such countries to guarantee that they fundamentally

overhaul their public finance and economic fundamentals.

Since the beginning of 2012, Berlin has slowly begun

complementing this with a new-found emphasis on growth

and jobs creation for the entire eurozone. But this coupled

emphasis – the so-called “second leg” of the EU’s response

– is not to be found in stimulus but in deep, German-style

labor-market reforms that should reduce unit labor costs.

Even while confounding American and European markets

and economists, German Chancellor Angela Merkel’s

response to the crisis seems to place her squarely in

the current of German political Zeitgeist. She shares with

her finance and defense ministers the highest approval

rating (63 percent, a personal high reached previously in

November 2009) of any national German politician. Her

popularity comes despite a faltering coalition partner and

scandals consuming her hand-picked president.

Six primary traits have characterized German decision-

making in the eurozone crisis:

Stability Culture: In the past decade, Germany has

transformed itself from the sick man of Europe, as portrayed

by The Economist in 1999, to the cautious colossus. Reforms

implemented under the Schröder and Merkel governments

created the conditions for the German economic buoyancy

that allowed the country to weather the global financial

and economic crisis successfully. The Schröder government

introduced a series of politically difficult structural reforms,

including labor-market liberalization and adjustments

to unit labor costs, and a solid culture of tax collection.

Merkel’s policies complemented these reforms by raising, in

2007, the retirement age to 67, introducing long-term fiscal

discipline including the introduction of the “debt brake”

into the German constitution in 2009 (a quasi-balanced

budget amendment that will hold the German deficit at

or under .35 percent of GDP beginning in 2015), and being

deeply reluctant to engage in demand-led stimulus in the

aftermath of the 2008-9 crisis.2

Germany’s response to the eurozone crisis has been to lean

heavily on the conservative-minded stability policy that

has defined the governing CDU party’s ideology since the

early days of the Federal Republic. This sensibility dovetails

well with Merkel’s cautious political style. The heart of her

strategy over the last six months has been to put in place

hard fiscal constraints such as exporting by summer 2012

the debt brake to the constitutions of other eurozone

member states and to enshrine in a treaty automatic

sanctions for governments that go astray. Whatever the end

state of European fiscal and economic integration, Merkel

sees this as the issue on which she holds the most leverage.

She wants to exploit that to create an overlapping system

of fiscal measures that will guarantee budget stability and

foster greater competitiveness throughout the eurozone.

The Bild Zeitung Effect: The domestic debate in

Germany around the eurozone is effectively sound proof,

impermeable to external voices. International perspective

is largely muted. The Bild Zeitung, the populist broadsheet

read by more than 2.9 million Germans daily, is a barometer

for one vehemently euroskeptic streak in German public

thinking.3 With headlines such as “Why are We Paying for

the Greeks’ Luxury Retirement?”, “Sell Your Islands, You

Bankrupt Greeks!”, “Swastikas! The Greeks Taunt Europe

even as They Receive Billions More”, the Bild Zeitung reflects

the frustrations of many Germans and often becomes

the narrative around which policy debate coalesces.4

The German government has done little to counter this

populism. It has not effectively communicated the gravity of

the crisis at home, leaving many in the Bundestag and the

general public with the impression that the crisis is not as

existential as the Anglophone and Mediterranean press have

portrayed it to be.5 Berlin has also failed to acknowledge

THE MAIN PLAYERS

“You have become Europe’s indispensable nation.”– Radosław Sikorski, Polish foreign minister, Berlin, November 29, 2011

Germany has long benefitted from an undervalued currency at an

effective fixed exchange rate that has bolstered its competitiveness

vis-à-vis its neighbors.

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adequately Germany’s interdependence with eurozone

markets. And it has not examined its own culpability in

the peripheral states’ private- and public-debt explosion

as a result of its current-account surpluses. Germany has

instead resorted to the sort of punitive measures to which

the Bild Zeitung would subscribe.

Let the good times roll: Polls show that Germans do

not yet sense the magnitude of the crisis as their eurozone

counterparts do. Consumer confidence in the country

is high and has climbed through January 2012.6 Business

confidence also continues to grow with the six-month

outlook for German companies higher going into January

2012 than at any point since October 2011.7

In fact, the eurozone crisis has in some many led

to unintended benefits for the German economy.

Unemployment in December 2011 dipped to 6.7 percent, its

lowest recorded level since German reunification in 1990.8

And waves of skilled labor from the employment-starved

eurozone south continue to flow into Germany in search of

work. Intra-EU migration to Germany was up 19 percent in

the first half of 2011 over the same period in 2010.9

Observers have noted that the German government has

been able to achieve a number of political and economic

objectives since the onset of the crisis in October 2009,

sometimes as a direct result of the crisis itself. The German

growth miracle that began in early 2010 was ignited by the

euro’s rapid depreciation, which boosted German exports

on world markets. Germany may again benefit from this

if the currency continues to depreciate gradually in 2012.

Within the eurozone, Germany has long benefitted from

an undervalued currency at an effective fixed exchange

rate that has bolstered its competitiveness vis-à-vis its

neighbors. And the Bund has strengthened its position

as a euro-denominated safe haven due to credible public-

debt targeting, stable macroeconomic conditions, a strong

current account position, and strong competitiveness

relative to other eurozone member states. Most recently,

Germany’s bonds have confounded logic by yielding

negative nominal interest rates for the first time in the

country’s history.10

The German party system is structurally pro-European:A remarkable feature of the German political

landscape is the absence of an organized mainstream

euroskeptic political party. This is unlike other major

EU member states such as France, Italy, the Netherlands

and the UK. From left to right, all of Germany’s major

mainstream parties favor greater European integration.

Only the far left party, Die Linke, a hybrid successor to the

German Communist party along with a group of Social

Democrat defectors, is steadfastly euroskeptic, but the

party is still seen as a marginal force in national politics.

The absence of euroskepticism was reaffirmed at recent

conventions of three of the governing parties in fall 2011:

the Christian Democrats, their Bavarian sister party the

Christian Socialists, and the free-market Liberals.11 The pro-

European attitudes are a product of Germany’s history as a

vanguard of European integration and of the high barriers

to entry for new political parties.

Germanyismorepragmaticthandoctrinaire: Some

attribute an almost Kantian “categorical imperative” to

German political decision-making.12 They cite Germans’

prolonged citations of the Treaties as the basis for action

and contend that Germany acts out of a sense of doctrinal

purity and commitment to a rigid set of values. In fact, the

Germans have shown themselves to be open to compromise

in the past two years. For example, it was the Germans who

adeptly interpreted the Solidarity Clause (Article 222) of

the Maastricht Treaty – a provision originally intended for

emergency assistance in the face of natural or man-made

disasters – as the legal basis for intra-eurozone loans.

Many faces of Germany: Observers of Europe, and

even European politicians themselves, often subscribe

to the fallacy that Germany’s position on the eurozone

crisis is inherent to the German political psyche. Germans

themselves often cultivate this perception. Sometimes

politicians dig deep into the darkest eras of Germany’s past

for tropes that justify current policy. In this way, political

choices cease to be political and become culturally hard-

wired. While this line of argument has served the Merkel

government well and has some shade of truth, Germany’s

position on the crisis is not monolithic. Both the Merkel

government’s aversion to a potential eurobond scheme

and opposition to a dual mandate of the ECB have been

supported by Germany’s leading opposition party, the

Social Democrats. In 2001, then-Chancellor Gerhard

Schröder stated that the ECB should look at growth and

inflation when setting interest rates.13 In August 2011, the

leaders of the SPD held a high-profile press conference to

express support for eurobonds. Along with the Greens, the

entire center-left has already given its backing to mutualized

guarantees for state finance in the eurozone.

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A remarkable feature of the German political landscape is the absence of an

organized euroskeptic political party.

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Thomas Mann’s oft-quoted dictum that he was “not for a

German Europe, but a European Germany” became a central

mantra for the Kohl government in the harrowing period

between German reunification and the Maastricht Treaty.

But both sides of the phrase are embedded in Germany’s

political presence in Europe today.

In the crisis, Germany has mitigated its role between

championing a German Europe and accepting a European

Germany (see chart). But the focus has slowly shifted

toward the latter. The Greek bailout in March 2010, the

establishment of the European Financial Stability Facility

(EFSF) in May 2010, emergency safety valves on sanctions

in the economic governance packages outlined in March

2011, and a surgical treaty revision to make the European

Stability Mechanism (ESM) a permanent successor to the

EFSF in July 2012 are all indicators of a shift towards a

European Germany.

The CDU party platform now allows for bond purchases

by the ECB as a last resort. The platform also allowed

the possibility of mutualized debt following eurozone

integration, direct election of the European Commission

president, and combining the roles of Commission and

Council presidents.14 All of these would set the EU on better

footing to restore confidence in its governing system. The

challenge, many commentators have noted, is timing. In

the course of the crisis, German decision-making has been

glacial yet decisive. Either way, it has shown that where

Germany goes, so goes Europe’s future.

Balancing Germany’s Unilateral Demands (German Europe) with Germany’s Common Interests with most EU Member States (European Germany)

German Europe European Germany

Budget monitoring and sanctioning through Budget surveillance with reverse qualified majority the Commission voting for the imposition of sanctions

Internal devaluation through wage suppression European Financial Stability Facility (EFSF)/ European Stability Mechanism (ESM)

Inflation targeting as the ECB’s sole mandate Stability or eurobonds (as an end goal)

Labor market reforms and end to wage indexation Eased voting for loans from the EFSF/ESM

Raising the retirement age Financial-transaction tax

German Constitutional Court limits on EFSF lending Higher EU-wide investment in infrastructure projects and research

Debt brakes along the lines of those introduced into Promotion of labor mobility the German constitution in 2009

Targeted use of structure and cohesion funds to promote competitiveness

Private-sector involvement in debt write-downs in Greece

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The European Central Bank (ECB) is the only EU institution

to weather the eurozone crisis with a high degree of

credibility among international economists and markets.

Other institutions – the European Commission, the

European Council, the European Financial Stability Facility

(EFSF) and the cluster of new micro-prudential supervisory

bodies, in particular the European Security and Markets

Authority (ESMA) and the European Banking Authority

(EBA) – are too new, too beholden to entrenched interests

in member states, or too under-resourced to restore

confidence in the eurozone.

Until the onset of the financial crisis in 2007, the ECB

demonstrated a strong degree of loyalty to its Bundesbank

pedigree. The ECB guaranteed price stability, particularly

through medium-term inflation targeting at or below

two percent. The bank also maintained its fierce political

independence from governments.15 The ECB’s strict

adherence to the Maastricht Treaty constrained its ability

to act but at the same time reinforced its credibility. Its

willingness to raise interest rates to firm up the currency and

assuage fears of imported inflation bolstered the fledgling

institution’s reputation as the Europeanized successor to

the Bundesbank.

In the 2007-8 crisis, the ECB began to demonstrate greater

flexibility, particularly in its willingness to intervene in

markets via its discount window (standing facilities) to help

Europe’s troubled banking sector. Then-ECB President Jean-

Claude Trichet recognized early on that global imbalances in

capital and risky lending could imperil the financial system.

The bank quickly and decisively activated the eurozone’s

reserve network to increase liquidity to keep European

banks lending.16 As the global financial downturn became an

acute eurozone crisis, the ECB began to purchase sovereign

bonds from troubled states on the eurozone periphery,

some of which have since resorted to the IMF and the EFSF

for lending relief.

Since assuming the ECB presidency on November 1,

2011, Italian central banker Mario Draghi has addressed

speculation about the ECB’s willingness to continue Trichet-

era policies. Speaking about a possible Greek exit from the

eurozone at his first press conference as ECB president,

Draghi stated simply that “it is not in the treaty.”17 The

response hinted at three tenets that could define Draghi’s

governing philosophy during the crisis: 1) a desire to bolster

the indivisibility of the eurozone; 2) a demonstration of

strict adherence to the Treaty as the governing document;

and 3) an assertion of the bank’s independence.18

Draghi has indicated a willingness to consider greater

intervention now that a fiscal union and tighter budgetary

controls among national governments is on the table.

Speaking before the European Parliament on December 1,

2011, he said that “a new fiscal compact would be the most

important signal from euro area governments embarking on

a path of comprehensive deepening of economic integration.

It would also present a clear trajectory for the future

evolution of the euro area, thus framing expectations.”19 At

the same time, he insists that any ECB intervention stay

7

“We have delivered price stability over the first 12 years of the euro – impeccably! Impeccably!”– Jean-Claude Trichet, ECB president, on the bank’s record in the face of German criticism, Frankfurt, September 8, 2011

European Central Bank

Germany/Bundesbank

Netherlands

ECB

Finland

Italy

European Commission

Ireland

France

Spain

Stability/Inflation Targeting

THE EUROPEAN CENTRAL BANK

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within the framework of the Maastricht Treaty, meaning the

bank’s intervention is ultimately limited in duration and

scope.20 Since the European summit in December 2011,

euphoria around potential ECB intervention in sovereign-

bond markets has subsided. The ECB has instead stepped

up low-interest credit availability to the banking sector.

These funds could be used to acquire sovereign bonds, but

the impact would not be as potent as direct ECB purchases.

The ECB’s success in 2012 will be contingent upon a delicate

balancing act between its independence and its legitimacy,

particularly in Germany.

TheECB’sindependenceoffersalegalwindowforexpedient action: Prior to the crisis, some countries –

particularly France and Italy – began to question the bank’s

staunch independence and inflationary targeting.

In the early part of the financial crisis, French President

Nicolas Sarkozy did not shy away from using the ECB as

a political foil. He stated that the euro is overvalued by

30 percent to 40 percent, assailed the bank’s “counter-

productive” interest rate hikes in summer 2008, and rued its

independence as a “historical error”.21

Today the French government has come around to respect

the ECB’s independence, primarily because Paris sees it as

the avenue to market easing over German objections. The

bank has demonstrated during the crisis that it is willing

to assert that independence, even if that means snapping

at its most protective benefactor, Germany. Garnering the

public ire of adherents to Bundesbank orthodoxy, the ECB

opposed private-sector involvement in the Greek bailout in

July and intervened in Italian and Spanish bond markets.

At their summit in Strasbourg in November 2011, the

leaders of France, Germany and Italy spoke explicitly about

the sanctity of the ECB’s independence. But this vague

accordance masks real differences among the three. France

and Italy want active intervention in bond markets to hold

down interest-rate spreads and offer respite to countries

with higher interest rates; Germany prefers markets to see

ECB independence as non-interference with the natural

course of market pressures holding forth.

The red lines of Bundesbank orthodoxy: Some

circles in Frankfurt and Berlin feel betrayed by ECB actions

and purported plans to intervene more actively in bond

markets.22 Doctrinaire German economists see the ECB’s

credibility rooted in its adherence to the Maastricht

Treaty.23 For them, calls for primary-market debt purchases

or even interest rate-spread targets violate the Treaty. Even

secondary-market purchases cause discomfort; some see

that as a slippery slope to debt monetization.

German public discourse on the ECB’s role in the crisis

has shown that the bank’s intervention could undermine

German confidence in the euro even as such actions help

save European monetary union. In May 2010, Axel Weber,

Bundesbank president and heir apparent to the ECB

presidency, publicly criticized the ECB, and in February

2011 he decided to leave the institutions of the European

monetary system. Jürgen Stark, the German ECB chief

economist, subsequently and abruptly left that bank’s

governing board, a move that many have interpreted as a

response to its bond purchases following the July European

summit. Stark and Weber had voted in the governing board

against the purchase of troubled sovereign bonds. The

opposition to the ECB’s moves also extended to the highest

political levels in Berlin. In August 2011, German President

Christian Wulff openly criticized the ECB for overstepping

its mandate, saying “I regard the huge buy-up of government

bonds of individual states by the European Central Bank as

legally questionable.”24

Finally, recent personnel decisions under Draghi’s leadership

heightened questions about the ECB’s fealty to its heritage

in Frankfurt. The position of ECB chief economist, one held

by a German at the ECB since its inception, was offered to

Belgian Peter Praet although Stark’s German replacement

on the ECB’s executive board, Jörg Asmussen, was widely

seen as the presumptive successor to the chief economist

position. The decision sparked an unusual amount of

German media attention and questions about the German

monetary establishment’s being sidelined.25

If the ECB’s legitimacy in Germany begins to decline as a

result of future bank action, the EU could face another crisis

of confidence on the monetary side.

If the ECB’s legitimacy in Germany begins to decline as a result

of future bank action, the EU could face another crisis of

confidence on the monetary side.

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FRANCE

The eurozone crisis has placed France in the difficult position,

fighting to maintain the status quo power constellation

in Europe. Paris’ dilemma arises from an ideological pull

between two diametrically opposed economic alternatives:

1) remain consistent with long-held, growth-driven fiscal

practices and ever increasing demand-side policies, and risk

a credit-rating downgrade; or 2) ally itself with the fiscally

spartan, structurally reform-minded Germany to maintain

(at least the perception of) its place in the elite core of

strong economies. France stands Janus-like with one face

toward Germany and one toward Mediterranean countries

such as Italy and Spain. This position has defined France’s

European economic policy since the early 1980s.

In the eurozone crisis, France is the key proponent of a

give-and-take approach, a combination of strict budgetary

monitoring and eased access to capital that German

Chancellor Angela Merkel dismissed so forcefully at the

Tripartite Summit in Strasbourg on November 24, 2011.26

The French political leadership has staked out a position

balancing initiatives aimed at fiscal rectitude with those of

eased assistance to weaker states.

So far, Paris has skillfully achieved its tactical goals in the

emerging EU framework to resolve the crisis. The treaty

arrangements under consideration are – at least for now

– intergovernmental rather than based on community-

based. In addition, the punitive measures for correcting

future budgetary overreach still contain an emergency “out”

in the form of reversed qualified majority voting. Finally,

Sarkozy was able to nudge Berlin towards balancing its

calls for austerity with greater emphasis on growth and jobs

creation.

Still, given the Sarkozy government’s low popularity at

home, its EU negotiating success in late 2011 could prove

a pyrrhic victory. Four salient factors will determine French

negotiating behavior in the coming months:

Maintaining parity with Germany: Since German

reunification, France has been eager to tether German

strength to the European integration process in a way

that allowed Paris to draw down its interest rates and to

maintain the European balance of power with the Franco-

German tandem at its heart. The European monetary union

was the result of that.

The past ten years, however, have brought vastly different

fortunes to France and its neighbor to the east. Both had

similarly high structural unemployment in 2004, 9.2 percent

in France and 9.8 percent in Germany.27 Both enjoyed

current account surpluses in 2002, with France’s at 1.8

percent and Germany’s at two percent.28 Both embarked on

ambitious structural reform processes between 2002 and

2006 to improve the competitiveness of their economies

and reduce unemployment.

Their success in implementing structural reform, however,

diverged. Unlike Germany’s successful rewiring of its labor

market, France failed in its efforts to pass a compromise

reform package in the New Employment Contract (CPE) in

2005.29 French domestic demand outstripped exports and

unit labor costs outpaced productivity. France also has the

second-highest employment-protection level in the OECD.30

Today, French unemployment is stuck at 9.3 percent. It has

a current account deficit of 2.1 percent of GDP, a budget

deficit of 5.7 percent of GDP and carries debt of 85.4 percent

of GDP.31 The veneer of French parity with Germany has

been based largely on its AAA sovereign-debt rating.

FranceperceivesitsAAAratingastheRubicon:For

France, the rating has become the symbol of the country’s

decades-long economic transformation started during the

Mitterrand presidency. It is the economic variant of its

permanent UN Security Council seat, a source of prestige.

The French government is determined to ring-fence its

creditworthiness through a series of reform measures

including: 1) supporting a so-called regle d’or, the balanced

budget amendment; 2) addressing structural reform

issues affecting the labor market and working hours; and

3) advocating protective measures to limit the banking-

sectors exposure (seen in Paris’ reluctance to support in

July 2011 deep haircuts for Greek debt that would expose

French banks to insolvency).

Greater mutualization of public and private debt has

traditionally been France’s position, particularly in the case

of bank recapitalization. French banks are among the most

exposed to the tenuous debt of Europe’s periphery. Many

European banks brought significant amounts of sovereign

debt onto their balance sheets to meet capital requirements

set by the Basel II agreement. Such debt was seen at the

time as risk-free buffer capital. As such, France was the

lead proponent for transforming the EFSF into a bank. This

would give the EFSF access to the ECB’s unlimited lending

capacities to facilitate bank recapitalizations. France

also advocates easing EFSF loan approval by making it

contingent on qualified majority voting of member states

rather than unanimity.

“If we want more solidarity, we need more fiscal discipline.” - Nicolas Sarkozy, French president, on the grand bargain for the future of the eurozone, Toulon, December 1, 2011

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Lowstructuralreformtolerance: The French street is a

powerful political tool in the country’s political life. France’s

abortive attempts to pass structural reforms to its labor

market in 2005 and 2006 demonstrate the informal veto

that high-profile protests and strikes can have. A pension-

reform bill was passed in 2010 with minor revisions, but it,

too, demonstrated the French electorate’s traditionally low

tolerance of reform. The power of street protest in French

political life is acute. In his speech in Toulon on December

1, 2011, President Sarkozy stated that the country must

“mobilize the mind” to push through structural reforms

again.32 In early 2012, he already began to outline these

reforms and declare his support for deeper austerity. In

doing so, he will again test his country’s willingness to

accept reform.

April 2012 elections: Some observers speculate that

President Sarkozy’s re-election hinges on his strategy to

embrace Germany’s position on a balanced-budget law

and other austerity measures. The fault lines around this

position have become the electoral cleavages between the

incumbent and his main rivals on the right and the left.

Socialist presidential candidate François Hollande and far-

right Front National Marine Le Pen have warned against

any transfer of fiscal sovereignty to unelected institutions

such as the European Commission or the European Court

of Justice. President Sarkozy is attempting to outflank his

electoral opponents by finessing his position to include

German austerity, national parliamentary fiscal control and

member state sanctioning authority.

Sarkozy tends toward Gaullist suspicion of the supranational,

especially for budgetary and fiscal expenditure issues. In his

Toulon speech, he said: “The rebuilding of Europe cannot be

the march toward more supranational” decision-making.33

This is consistent with debates in spring 2011 in which

France successfully injected a member state veto (see page

19) into the penalty process for the package for economic

governance.

Sarkozy’s comments hint at substantial differences between

French and German positions, with the ECB on Germany’s

side. The French may have scored a victory when the UK

veto led to an intergovernmental (not supranational)

approach to the new fiscal arrangements. Still, the

difference between an intergovernmental approach to fiscal

union and a community approach will continue to be a

point of contention between France and Germany. Berlin

and the Commission still favor the eventual incorporation

of any new agreement into the structure of the EU within

five years.

The establishment of a debt brake in national constitutions

is the one area where the German and French governments

have most stridently agreed. But the measure’s immense

unpopularity in France and the country’s upcoming

elections mean the debt brake may not come to pass in

Paris, even as other member states, such as Spain, are

moving towards approval. Even if Sarkozy wins re-election

in April or May and his center-right UMP party does well in

June’s parliamentary vote, French adoption of a debt brake

will be challenging.

1 0What Does Europe Want? The Who and How of Resolving the Euro Crisis

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After a decade of political atrophy, the European

Commission – the EU’s executive – entered the eurozone

crisis in a weakened state and remains the least influential

of the currency area’s key actors. Member states interested

in guaranteeing a dominant state-based approach to EU

governance used the European Council summits from

spring 2010 onward to splice community power, the areas of

pooled sovereignty administered by the Commission.

The Council, the legislative body of the 27 EU member states,

under the leadership of President Herman Van Rompuy, has

been placed at the center of a draft for European Economic

Governance (EEG) and more recently elevated to presiding

over regularized eurozone summits. These expanded roles

will give him significant influence over the relationship

between the eurozone and the wider group of all 27

EU member states. The establishment of the European

Financial Stability Facility (EFSF) as an intergovernmental

body beholden solely to member state consent has further

eroded the Commission’s role in economic and financial

governance. It does, however, have a role on the back end of

EFSF actions as part of a troika (with the IMF and ECB) that

is limited to monitoring the implementation of reforms in

Greece, Ireland and Portugal.

As the “guardian of the treaties”, the Commission pivots

between its function as a technical body, one tasked with

implementing regulatory enforcement, and a political

body, one responsible for introducing new legislation. It

closely guards its prized competency, the ability to initiate

EU legislation under the auspices of Article 17(1) of the

Maastricht Treaty.34 It has a clear stake in a more robust

pooling of competencies in fiscal, financial and economic

questions, and tends to represent this. The Commission

wants to position itself as the responsible party for a

tighter economic and fiscal union. But with the December

2011 decision to move forward with an intergovernmental

fiscal agreement in the wake of the UK veto, it is unclear

whether the Commission can fully buck the trend of its

diminishing political role. Member states will debate in the

coming months the Commission’s role in the future power

constellation while also examining ways to make it more

democratically accountable.

In the 1980s and early 1990s, the endemic pulse of Europe’s

integration process had the Commission at its center. It

could regain that position for the following reasons:

Laboratory of ideas: Despite its circumscribed role,

the Commission remains the source of many legislative

proposals that have defined the EU policy debate in the

crisis. The Commission launched the vehicle for fiscal

monitoring, the Six Pack (see page 19), that will serve

as the precursor to fiscal union. It has laid out a series

of proposals that have become the basis of discussion

for future economic governance. These ideas address

competitiveness targets that adhere to the Europe 2020

strategy for jobs and growth, the need for consistent fiscal

monitoring, support for a financial-transaction tax, and

mutualized bonds.35 The Commission couches its call for

eurobonds in terms of stability, a clear acknowledgement of

a need for German buy-in.

In a desire for greater political autonomy, the executive

body seeks to establish a source of revenue separate from

the member states. These proposals for so-called “own

1 1

The Commission pivots between its function as a technical body, one tasked with implementing regulatory

enforcement, and a political body, one responsible for introducing new legislation.

“For the euro area to be credible – and this is not only the message of the federalists, this is the message of the markets – we need a true Community approach...Within the Community competencies, the Commission is the economic government of the Union. We certainly do not need more institutions for this.” - José Manuel Barroso, State of the Union speech, Strasbourg, September 28, 2011

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1 2

resources” have included a 2010 suggestion for bonds

to fund infrastructure projects in member states and the

introduction of its support for a financial-transaction tax,

which some have said could be an independent source of

revenue for the EU.

Because the Commission’s influence vis-à-vis the member

states, particularly large countries such as Germany,

France and the UK, has never been fully clarified, personal

relationships between national and Commission leaders

are key to determining the Commission’s role in crisis

decision-making.

GrowingroleintheeurozoneSouth: The Commission

is becoming the steward of Europe’s technocratization

and has taken a much more active role in managing the

eurozone’s troubled economies. Whether through tighter

monitoring of fiscal adjustments, prescriptions of structural

reforms, budgetary reviews or through staffing decisions in

new technocratic governments such as Italy’s and Greece’s,

the Commission is effectively colonizing the beleaguered

euro South. Its role in the troika places it at the center of

austerity measures, privatization, and pension, tax and

employment reforms in Ireland, Greece and Portugal. And

since September, the Commission’s Task Force for Greece

provides assistance for creating a reliable business climate

and reports quarterly on its progress.36

On the precipice of greater power?: The

Commission’s most important political mandate in the

eurozone crisis could come from its more muscular

surveillance role, particularly concerning national budgets.

Its responsibilities in this area under existing provisions,

such as the Six Pack, include overseeing the submission of

national policies to the Commission for scoring before they

are drafted in national parliaments, and implementing a

Super Commissioner for budgetary oversight.

Despite the UK’s high-profile veto of the EU Treaty option,

the Commission could also assume the responsibilities of

the Eurogroup presidency and acquire sanctioning authority

for profligate states that violate a new treaty.37 This would

be an awkward role, however, requiring the Commission

to submit a report at the request of a member state that

could subsequently be used as the basis for a case in the

European Court of Justice. As such, it will be singularly

focused on accelerating the pace of the agreement’s

eventual absorption into the EU Treaty. France and Germany

have indicated that the Commission should take the lead in

generating proposals to promote job creation and greater

labor mobility within the EU.

1 2

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The European Financial Stability Facility (EFSF), agreed

by the heads of the 27 EU member states in May 2010, is

a bailout fund for eurozone countries locked out of credit

markets and in need of financial stability. It is financed by

eurozone member states through pledged commitments.

The countries in need of assistance do not contribute to the

fund.

Countries can request support from the EFSF only if they

are unable to borrow on markets at acceptable rates. The

EFSF can issue bonds at an interest rate of funding costs

plus operational costs.38 The lending rates were intended

to be about 3.5 percent at the time of the agreement but

have soared as high as nine percent.39 This causes hardship

for countries that borrow; but unfortunately the market

does not offer a better alternative. Approval for a country

to receive EFSF aid requires unanimous consent from euro-

area finance ministers.40 This was a source of controversy

because of the no bail out clause in the Maastricht Treaty,

but leaders were able to work around that.41 It continues to

be a burden on economically strong countries that assume

capital guarantees and the accompanying interest. The EFSF

is slated to expire in June 2012, at which time a permanent

mechanism, the European Stability Mechanism (ESM), will

replace it.42 But since Standard & Poor’s (S&P’s) downgraded

the EFSF’s rating on January 16, 2012, EU officials have

intensified a push to bring the €500 billion ESM into place

by June 2012. The ESM requires the 17 eurozone members

to ratify a framework agreement and the EU-27 to ratify an

amendment to the Lisbon Treaty. Leaders are currently

debating the framework’s terms. Language stating that

countries deemed insolvent “shall be required” to negotiate

bondholder losses will be removed, much to the chagrin of

Chancellor Merkel, who has pushed for tougher language to

avoid further German taxpayer burden.43

The current lending capacity of the EFSF, amounting to

€440 billion, already contains commitments to Ireland,

Portugal and Greece. Ireland and Portugal are currently

receiving loans from the EFSF. Greece has been receiving

aid through loans dispersed by the IMF and bilateral loans

pooled by the European Commission, so the EFSF has thus

far not provided financial assistance to Athens.44 However,

the sources of funding of the second Greek bailout (€109

billion), announced on July 21, 2011, have not yet been

clarified.45 It could be that funds, at least partially, come

from the EFSF and the ESM.

Since its inception, the EFSF has lacked adequate funds

to guarantee financing of debts in countries such as Italy,

Spain or Belgium, should they lose access to credit markets.

The S&P downgrade of the EFSF and two of its significant

contributors, France and Austria, now forces the EFSF to

operate with even less funding. Proposals to leverage the

Facility have been discussed, the most recent being the

ability to lower funding costs through an EFSF issuance of

fixed credit protection (20 percent-30 percent), and through

public and private investment in bonds.46 But the EFSF has

yet to achieve the sufficient firepower of €1 trillion, largely

because investors are not interested in purchasing Europe’s

troubled bonds.

1 3

“Financial markets are skeptical because the EFSF can [make decisions] only unanimously. What we need is instrumentation capable of decision-making that can also be convincing to market participants.”- Wolfgang Schäuble, German finance minister, November 30, 2011

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What Does Europe Want? The Who and How of Resolving the Euro Crisis

THE EUROPEAN FINANCIAL STABILITY FACILITY (EFSF)

Current EFSF Lending Capacity Including Commitments for Country Programs (Billions)

€287

€26€17.7

€109

Effective Lending Capacity

Greece (potential)Portugal

Ireland

Data Source: EFSF

1 4

Eurozone leaders cannot rely on private investors to enlarge

the EFSF’s lending capacity to a credible size. An alternative

option under consideration is IMF leveraging. On November

25, 2011 the Dutch and Finnish finance ministers called on

the IMF to play a bigger part in boosting the EFSF’s lending

capacity. Bilateral loans from countries outside Europe were

touted as a way to “increase the effective size of the IMF”

with aspirations that the “IMF could play a bigger role in

the crisis,” according to Dutch Finance Minister Jan Kees de

Kager.47 But the IMF itself lacks sufficient lending capacity.

In a document released to the IMF Steering Committee in

September, Managing Director Christine Lagarde wrote, “our

lending capacity of almost $400 billion looks comfortable

today, but pales in comparison with the potential financing

needs of vulnerable countries and crisis bystanders.”48 Once

again, all roads return to possible ECB leveraging of the EFSF.49

Eurozone leaders cannot rely on private investors to enlarge the EFSF’s lending capacity to a credible size.

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What Does Europe Want? The Who and How of Resolving the Euro Crisis

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Since the July 15, 2011 stress tests of European banks

conducted by the European Banking Authority (EBA), it has

become apparent that several financial institutions have

serious exposure to risky sovereign assets.

Shockingly, Dexia, the Franco-Belgian bank, announced

a break-up on October 10, 2011 in spite of having passed

the July stress test. The main culprit was the bank’s large

exposure to bonds in the eurozone’s troubled periphery.

Many of Europe’s banks face similar contagion risks.

IMF Managing Director Christine Lagarde has urged a

“mandatory” recapitalization of Europe’s banks to address

the problem.50

In the days leading up to the October 26, 2011 EU summit,

politicians and bankers negotiated ways to reduce exposure

to Greek debt. Reports came from the “troika”(the EU, the

IMF and the ECB), which was charged with investigating

Greece’s balance books, projecting that Greece’s debt would

peak at 186 percent of GDP in 2013, even with a previously

agreed 21-percent debt write-down by private creditors.51

Banks, reluctant to face higher losses, won EU leaders over

with a compromise: A “voluntary” bond exchange that would

require a write-down of as much as 50 percent to 60 percent.

Details of the bond exchange will be negotiated with banks

in early 2012, but there is already fear that payouts will be

triggered on credit default swaps (CDS), whereby the bank

provides an insurance policy to the buyer against default

on governments bonds. Warren Buffet called CDS “financial

weapons of mass destruction.”52 They were a major cause of

the default of big financial institutions in the US, such as

Lehman Brothers and AIG. European leaders would be wise

to avoid this scenario.

In another move to prevent contagion, EU leaders agreed

on October 26, 2011 to force banks to recapitalize to reach a

core tier one capital ratio of nine percent by June 30, 2012.

The implications of this are:

1) The capital requirement will be favorable to German,

British and even French banks and less favorable to

Italian and Spanish banks because they will have to

raise more funds against their inevitable bond losses. It

comes as no surprise that one of Italy’s largest banks,

UniCredit, quickly announced recapitalization plans

amounting to €7.5 billion to reach the nine percent

requirement.53 The fact that guarantees are being made at the

national level feeds the current fragmentation in the

European banking system.

2) The relatively short timetable to achieve the capital

requirement will make it difficult for banks to raise private

funds. The European Banking Authority (EBA) has

assumed responsibility for clarifying the precise capital

shortfall, which, it announced on December 9, 2011,

is €114.7 billion.54 Banks must submit their plans for

recapitalization to their national authorities by

January 20, 2012, and these plans require subsequent

EBA approval.

3) Banks unable to raise private funds can turn to

their national governments for state aid. If such aid is

unavailable, national governments can seek loans from

the EFSF. Because most EU countries already pay into

the EFSF, the process is oblique.

Europe’s banking system still lacks consistency and

coordination, but attempts to rectify that are underway.

Financial advisers to the EBA have written EU finance

ministers to “urgently adopt a European approach” by

forming a resolution fund, jointly backed by national

governments that would provide guarantees to debt issued

by EU banks.55 This approach has received support from the

ECB and the European Commission. Germany, however,

has expressed concerns on behalf of the core European

countries. Berlin fears that taxpayers would be liable for the

exorbitant debt in the peripheral eurozone countries.

On December 9, 2011, the ECB announced exceptional

support for eurozone banks by making unlimited loans with

three-year maturities available. The previous maturity limit

was 13 months. The ECB also began accepting a wider pool

of collateral for loans and lowered its reserve requirement

for commercial banks from two percent to one percent. But

some analysts argue that this step does not address the lack

of uniform solutions to mitigating debt.56

1 5

“There is a clear need to restore the confidence in Europe’s banking sector, and the recapitalization plans for European banks are seen as a key part of the approach. But the scope and approach chosen will cause a number of serious problems.” – Charles Dallara, managing director, Institute of International Finance, in a letter to the Group of 20 summit leaders, November 1, 2011

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What Does Europe Want? The Who and How of Resolving the Euro Crisis

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The idea of a fiscal union is as old as the debate about

the single European currency. In the late 1990s the French

unsuccessfully insisted on aligning the euro with the so-

called gouvernement économique”58 Such a union is now back in

the headlines after receiving renewed support from German

Chancellor Angela Merkel, French President Nicolas Sarkozy

and Italian Prime Minister Mario Monti.

Such a union requires closer coordination on and stricter

centralized enforcement of budgetary rules. EU monetary

policy is currently decided on the European level, while

fiscal policy is determined nationally. The absence of proper

fiscal coordination is often cited as a major cause of the

euro crisis.

In March 2010, the EU began introducing legislation

that builds upon the Stability and Growth Pact (SGP)

and encourages greater fiscal discipline among member

states.59 This push towards greater fiscal union actually

began when the SGP was adopted in 1997, but the current

crisis has forced a fairly drastic acceleration of that original

momentum, and raised the stakes associated with forging a

path to successful macroeconomic harmonization.

The SGP was originally intended to coordinate national

fiscal and economic policy at the European level and to

“ensure that Member states maintain budget discipline in

order to avoid excessive deficits.”60 Its mechanisms for doing

so were simple and comprised two arms: one preventative,

one dissuasive.61 The SGP thus provided both oversight and

the potential for corrective measures in the event that any

member state (or states) fell out of economic harmony with

the others or with the EU as a whole. In practice, however,

the SGP never functioned as well as intended – particularly

when it came to dissuasive measures. Several member

states, notably France and Germany, found themselves in

breach of the SGP requirements as early as 2002.62 Given

their influence and position on the Council, larger member

states such as these were seemingly able to violate the three

percent/60 percent threshold requirements without fear

of reprisal. And despite the mechanisms in place to force

systematic corrections of any subsequent fiscal imbalances,

no offending member state ever faced disciplinary action.

Simply put, the European Council never followed through

on its power to bring sanctions.

Other notable deficiencies of the SGP include broad

non-compliance with medium-term objectives such as

balanced budgets or creating surpluses, even during times

when such goals were easy to achieve (i.e., mid 2000s).63

Perhaps most significantly, the SGP did not adequately

consider the different circumstances that defined each

member state’s economies when the Commission reviewed

budgetary policies. Instead, the pact promoted a one-size-

fits-all approach that disregarded differences between the

economy of a founding member state and that of a new

member state.64 On the whole, the SGP never worked as well

as intended.

A primary criticism of the SGP’s functioning under the

duress of the recent global financial crisis, besides its

general ineffectiveness, was its lack of “bite” to ensure the

compliance of all member states. Indeed, even the SGP

threat of “further proceedings” against member states

violating the three percent/60 percent threshold was

somewhat undefined. Such “proceedings” mostly involved

further review of a member state’s economic imbalances,

the creation of community incentives for a member state

to self-correct the imbalances (incentives which, if not

capitalized upon, merely resulted in further incentives), and

then, ultimately, possible sanctions.65

It is this lack of “bite” that the current package of economic

governance measures seeks to address. In principle, all

three are similar to the SGP. But they come with added

punch, a decidedly more specific corrective framework for

enforcement, and pointed tools for managing a fiscal union.

The following section analyzes the three primary pieces of

legislation – The European Semester, The Euro Plus Pact

and the so-called “Six Pack” – that attempt to give the SGP

teeth and, in some cases, double up on competencies and

creating redundancies in the process.

“The crisis has reaffirmed with great force that strong economic governance is a prerequisite for stability in a monetary union. Sadly, despite having experienced tremendous costs stemming from the sovereign crisis in the euro area, lack of sufficient progress in strengthening economic governance going forward, including clarity on crisis management, has become a grave source of instability in the euro area.”57

- Athanasios Orphanides, ECB council member, November 24, 2011

In practice, however, the Stability and Growth Pact never functioned

as well as intended.ECONOMIC GOVERNANCE

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The European Semester, introduced as a key element of

the Europe 2020 initiative in March 2010, is a framework

for integrated surveillance and multilateral policy

coordination.67 It is an annual assessment of national

budgets by the Commission that is meant to coordinate

member states’ economic policies vis-à-vis national

budgets, to reduce debts, and to incentivize growth

through harmonization. By improving coordination through

multilateral monitoring of member states’ economic

policies, this measure is designed to strengthen budgetary

discipline, macroeconomic stability and growth, and to

improve competitiveness. These goals are in keeping with

the broader Europe 2020 initiative. The process should

also engender a sense of common purpose and fate among

eurozone states.68 The European Semester is a far more

structured vehicle for the goals of the SGP, although it shares

many surveillance elements of the SGP’s “preventative” arm.69

The European Semester is more of a code of conduct than

a set of hard and fast commandments. It distinguishes

itself from the SGP by shifting the timing of the budgetary

process, and of fiscal and structural reform plans.70 The

former is significant because member states were previously

not obligated to make their economic policies contingent

on EU-level influence or approval. Under the Semester’s

rules, national parliaments must wait for the Commission’s

assessment of national policy before they can begin

negotiating their budgetary policy.71 The overall aim is to

strengthen economic policy coordination among countries

by providing what the EU refers to as ex-ante guidance to

states preparing their fiscal houses for the coming year.

A second institutional change introduced by the Semester

is “the alignment of the timing of fiscal and structural

reform plans.” Until now, member states submitted their

plans to align and harmonize with the rest of the EU

(Stability or Convergence Plans) at the same time as their

plans for achieving national budgetary targets (National

Reform Programs).72 The Semester separates the two and

requires more direct involvement, and approval, of the

European Commission and Council. Whether sovereignty is

impinged upon under this scheme is debatable: While the

final stage of national policy formation is free of direct EU-

level control, member states are so encumbered up to that

point that extricating EU influence from the last round of

budget negotiations is impossible.

The results of the European Semester have been mixed.

According to a recent Bruegel-Hertie report, member

states have thus far adapted differently to the European

Semester.73 Ownership of and adherence to the new

economic policy coordination cycle appears strongest in

the new member states. Old member states show strong

(but freely interpreted) adherence. Smaller member states,

those without significant economic relations with other

EMU/EU states, or those in significant economic difficulty

show little or weak adherence. Another problem is that the

European Semester does not differentiate and prioritize

policy actions across countries, and thus the Commission

tends to employ a “one-size-fits-all” approach to policy

recommendations.74

1 7

“The European Semester that begins today is at the heart of the reformed economic strategy. It is the first time [that] we are going to put in place these new instruments of joint governance at the European level… We are effectively introducing a genuine European dimension into national budgetary and economic policymaking for the first time.”66

- José Manuel Barroso, European Commission president, in a press conference to introduce the first European Semester process, January 12, 2011

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The European Semester is more of a code of conduct than a set of

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European Semester Timeline

Policy Guidance to EU and Euro Area Country-specific surveillance

European Commission

Council of Ministers

European Parliament

European Council

Member States Adoption of National Reform Programmes (NRPs) & Stability and Convergence Programmes (SCPs)

Spring EU Summit

Debate & Orientations

Annual Growth Survey

Debate & Orientations

Policy Guidance IncludingPossible Recommendations

Finalisation & Adoption of Guidance

Endorsement of Guidance

JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY

Autumn: Decisions at national level.

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THE EURO PLUS PACT

The Euro Plus Pact (EPP) was drafted by the Council,

largely at the insistence of German Chancellor Merkel

and French President Sarkozy. It is yet another measure

designed to expand the scope and power of the SGP. It is an

intergovernmental mechanism designed to “strengthen the

economic pillar of the monetary union, achieve a new quality

of economic policy coordination, improve competitiveness,

thereby leading to a higher degree of convergence.”76 By

obliging countries to incorporate the SGP’s fiscal rules

into national legislation to maintain competitiveness

and avoid fiscal imbalances, the EPP is the next logical

step in realizing the SGP’s original goals. The EPP makes

political and economic decisions previously and exclusively

concluded at the national level subject to convergence with

other member states at the EU level.77 Like the European

Semester, however, the development of policies to achieve

convergence remains the prerogative of member states.

There are “broad areas of coordination – e.g., keeping wages

in line with productivity,” but “the policy mix remains the

responsibility of each country.”78

The EPP was endorsed during the European summit in

March 2011 by eurozone leaders (particularly Sarkozy and

Merkel). Non-eurozone states Bulgaria, Denmark, Latvia,

Lithuania, Poland and Romania also voiced support.79 The

EPP focuses primarily on national competencies that are

key to increasing competitiveness and avoiding harmful

imbalances. While the euro-area members agreed on

the pact, other EU member states have been invited to

participate in it – but this is only on a voluntary basis, as

participation in the EPP is not required of non-eurozone

states (non-participants of note include the UK, Hungary

and the Czech Republic).80

The EPP includes structural features that are absent in the

SGP, such as recognition of the differences among member

states’ economies, an awareness of spillover effects from one

member state’s policies on another’s, and an understanding

among member states that upholding the integrity of the

single market must be the guiding principle behind political

and economic convergence strategies.

However, the pact has yet to deliver greater integration

among its adoptees. This is perhaps due to the open

coordination method used to adopt the measures, which

combines the legislation with others to stave off a worse

eurozone crisis, and to provide another mechanism by

which eurozone members can more fully integrate their

economies and collectively monitor fiscal behavior.81

The EPP is not without its critics. Primary criticisms surround

its seeming country bias, and its lack of real “teeth”. The

first complaint relates to the emphasis on competitiveness

indicators and their utility. The EPP has reinforced the

idea that competition – because peripheral countries have

lost competitiveness in the last year – is the only problem

that needs to be resolved. This approach is taken because

“creditor countries control the official agenda and are free

to put emphasis on those issues that do not require much

adjustment on their side.”82 No focus exists on issues that

are not problematic for Germany (national debt brake,

increasing retirement age, etc.). Other issues that would

require German reform, such as service-sector liberalization

and dealing with doubtful assets on the balance sheets of

“government sponsored” banks, have simply been omitted.

Regarding the lack of enforcement mechanisms (the

“teeth”), the EPP is big on meaning but short on delivery.

Belgian MEP Guy Verhofstadt has already noted the absence

of EPP credibility on this issue. “It sets out a series of fine-

sounding intentions and ambitious objectives without

indicating how the member states are to be compelled to

take the measures and implement the reforms which are

needed in order to attain the objectives,” he has said.83

Others, such as Daniel Gros of the Centre for European

Policy Studies (CEPS), have argued that the fundamental

problem of member states’ divergence on basic competition

issues, such as unit labor costs, cannot be made subject

to correction by government pressure. Rather, market

forces and the demands of creditors drive such things, and

they are outside the regulatory purview of convergence/

competitiveness correction mechanisms such as the EPP.

Additionally, this mechanism that single-mindedly focuses

on competition in Europe excludes some of Europe’s most

competitive nations (the UK, Denmark, Sweden, Poland,

Czech Republic).

“It will provide a new quality of economic coordination. And we call it the Euro Plus Pact for two reasons: first, because it is about what eurozone countries want to do more. They share one currency, and wish to undertake efforts on top of the existing EU commitments and arrangements. Secondly, because it is also open to the others… from non-euro countries.”75

- Herman Van Rompuy, European Council president, in a press conference to introduce the Euro Plus Pact, March 25, 2011

The Euro Plus Pact is the next logical step in realizing the Stability and

Growth Pact’s original goals.

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These measures contain six legislative proposals to

strengthen the EU’s and, in particular, the eurozone’s

economic governance. Four of them focus on reforming

the SGP, two on addressing macroeconomic imbalances.85

The Six Pack features mechanisms for early detection

of imbalances and subsequent enforcement of punitive

actions against non-compliant member states (e.g., a

codification of the European Semester procedures into

law). Together, these measures are designed to enhance

budgetary discipline as intended under the SGP, to ensure

a satisfactory reduction in member states’ public debt, and

to decrease high deficits by achieving ambitious, country-

specific, medium-term budgetary objectives.

The Six Pack constitutes the most comprehensive set of

economic regulations pursued since the creation of the

eurozone. The Commission first presented these legislative

measures in September 2010. The European Parliament

approved them on September 28, 2011, and the Council

adopted them on November 8, 2011. Collectively, and in

coordination with other elements of the new economic-

governance rules, the six are intended to provide a method

for much stricter implementation of the SGP by increasing

transparency and accountability, enhancing surveillance

of fiscal and macroeconomic policy across the EU, and

giving the Commission more power to sanction and punish

offending member states. The Six Pack is the teeth missing

from the SGP.86

This set of new rules did not, of course, come about easily.

France and Germany, despite sharing largely congruent

aims, differed on execution. But Germany long pushed

for the adoption of common fiscal standards and norms

(unsurprisingly those that resemble its own fiscally

responsible practices).87 Not all eurozone members are

pleased with this approach. In the context of the euro crisis,

Berlin argues that its own growth and employment figures

demonstrate that it has the correct approach, and therefore

is right to push other EU countries down its path.

One primary issue of contention hinged on the nature

of sanctions for states that flout the new rules. Should

sanctions be imposed automatically (as favored by

Germany) or implemented via some form of qualified vote

in the Council (as favored by France). Paris also wanted

Council-approved warnings to precede sanctions. The

legislation’s final version includes a compromise that

allows for “reverse qualified majority” voting on warnings.

It stipulates that “in case of a persistent and/or particularly

serious failure to respect the rules, the Commission will draft

a recommendation to the member state to take corrective

action. The recommendation will be adopted by the Council

unless a qualified majority of member states vote against

it.”88 If no such majority blocks the recommendation, then

it is automatically issued. The French won a minor victory,

even if it came at the expense of a more rigorous and

effective corrective mechanism.

It’s difficult to speculate on how the Six Pack will play

out, which makes the dual-pronged hopes of these

measures more likely to have dual-pronged results. On

the one hand, the integrationist trajectory written into the

rules brings hope that Europe’s fiscal houses will better

coordinate and create a better firewall to defend against

future economic crises. If implemented stringently and

rigorously, the governance package could work well at

binding the individual and collective economic health of

all member states. This would prevent future catastrophic

imbalances and steer a course towards a more perfect fiscal

union. However, the severity of the envisioned methods

of correction (i.e., fines and sanctions in cases of member

state fiscal impropriety) could also turn potential crises into

much more serious economic difficulties for both offending

states and their neighbors.

More recently, a few weeks before the December 9, 2011

summit, the European Commission proposed two new

pieces of legislation designed to complement the Six

Pack measures by increasing the Commission’s power to

provide budgetary surveillance of eurozone countries.89

The proposals allow for enhanced monitoring procedures

and mechanisms, and are targeted primarily at eurozone

member states in the greatest financial danger (i.e., those

facing severe stability problems, those accepting financial

assistance, or those just moving off such assistance). An

expanded set of monitoring tools includes “a common

budgetary timeline [and] common budgetary rules”. The

tools can vary in their “intrusiveness” depending on the

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“This ‘Six Pack’ reforms the Stability and Growth Pact and widens surveillance to macroeconomic imbalances. We are now back very close to what the Commission originally put on the table… This legislation will give us much stronger enforcement mechanisms. We can now discuss Member States’ budgetary plans before national decisions are taken. This mix of discipline and integration holds the key to the future of the euro area.”84

- José Manuel Barroso, European Commission president, State of the Union speech, September 28, 2011

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severity of a member state’s financial situation.90 The

primary value-added feature of the proposals is that

governments would be required to “publish and present

their draft budgetary plans in advance of their adoption by

national parliaments”.91 This still does not, however, grant

the Commission the right to veto member state national

budgets.

The ECB sees measures such as those comprising the Six

Pack (and the two new complementary measures) as the

only way to limit the eurozone’s broader troubles while

building sustainable economic stability. The Commission,

which helped introduce and further many of the new

governance proposals, has a strong interest in using them to

advance economic integration and to protect Europe from

future economic crises. Being vested with significant new

powers under the new economic governance scheme, the

Commission is in a new position of strength. And despite

criticism from some member states that the totality of the

new measures is tantamount to a sovereignty-sapping

“United States of Europe”, controlling or preventing future

crises would prove impossible for European institutions

without the new corrective tools and powers.

The Six Pack constitutes the most comprehensive set of economic regulations pursued since the creation of the eurozone.

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FISCAL UNION

The proposal for fiscal union is the most ambitious of the

proposals to solve the eurozone crisis because its credibility

requires buy-in from many EU member states. Although

it remains unclear how fiscal union differs from the

aforementioned EU legislation on economic governance,

some EU leaders believe a new agreement with a legally

binding mechanism would make, at a minimum, the rules

appear more enforceable to doubtful investors.

German Chancellor Angela Merkel has been a strong

advocate of achieving fiscal union through treaty change,

which requires ratification by all 27 EU member states. She

was disappointed by UK Prime Minister David Cameron’s

announcement at the December 8-9, 2010 EU summit that

London would not participate in a new agreement. Cameron

attempted to obtain special treaty concessions for financial

services in exchange for his approvals, but EU leaders did

not budge. The conventional thinking is that weak regulation

of financial services helped create the eurozone crisis.

French President Nicolas Sarkozy has favored an

intergovernmental agreement starting with the eurozone 17

and offering other EU member states an option to sign on

later. He has only reluctantly supported Merkel’s proposal

for treaty change92, a position mirrored in the French public.

A recent poll by Harris Interactive shows that 64 percent of

French respondents value national sovereignty and think

that states should act independently without permission

from European partners.93

The compromise proposal that Merkel and Sarkozy

negotiated includes automatic sanctions for countries that

breach the EU’s deficit limit of three percent stipulated in

the Stability and Growth Pact (SGP). The “automaticity” of

the sanctions demonstrates the need to apply the rules

more forcefully, as they have been repeatedly broken in

the past. Should a country wish to reject a sanction, it

would need a qualified majority agreement among all

the eurozone states.94 Additionally, the proposal calls for

balanced-budget amendments to be enshrined in national

constitutions.

All member states but the UK agreed to a new fiscal compact

at the December EU summit. At the next EU summit on

January 30, 2012 leaders should consider an initial draft of

the compact before adopting it at a March 1, 2012 European

Council meeting. A working group comprised of member

state advisors is working on the draft.

Plans are also progressing for an intergovernmental

treaty, which will exist outside the EU Treaty, among

26 EU member states. Such pacts normally provide

EU institutions with limited enforcement power, but a

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UK

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European Commission

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Community Centered

Member State Centered

“The lessons are very simple: rules must be adhered to, adherence must be monitored, non-adherence must have consequences.” – Chancellor Angela Merkel, Bundestag address, December 2, 2011

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crisis is still low.

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recent draft was controversial for a provision allowing the

Commission to bring a profligate member state to the

European Court of Justice (ECJ). This was criticized by the

UK, which insisted that an agreement outside the EU Treaty

should not give new powers to EU institutions. When that

provision was subsequently removed, a prominent group of

MEPs complained that the draft language did not respect

the integrity of the EU institutions.95 On January 18, 2012,

the European Parliament adopted a resolution expressing

doubts about the necessity for an intergovernmental

agreement (P7_TA-PROV(2012)0002).

Meanwhile, the ECB has criticized the draft as substantially

watered-down. Jörg Asmussen, an ECB executive board

member, wrote in a letter to the Financial Times that “[t]hese

revisions… clearly run against the spirit of the initial general

agreement on an ambitious fiscal compact.”96 ECB backing

has been important for eurozone leaders to obtain because

they initially believed an ambitious fiscal compact could

encourage the bank to step up its intervention in flailing

bond markets, thereby assuaging investor fears. But by the

start of the December 2011 EU summit, the ECB signaled

it would not act that way. The latest criticism of the draft

further dampens its impact.

It is also unclear if the agreement would require a national

referendum in Ireland, where passage would be anything

but assured.97 Given this potential hurdle, Chancellor

Merkel appears to want to make ratification a requirement

for further bailouts.

Eventually, the intergovernmental agreement could be

inscribed into the existing EU Treaty. This could realistically

happen within five years.98 Such an approach would help

satisfy the European Commission, which has repeatedly

denounced any method that establishes a fiscal union

that divides the EU into a “two-speed Europe”.99 Given the

agreement’s diminished impact in the short term, however,

confidence in the finality of the eurozone crisis remains low.

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The European Commission and certain political leaders

support creating mutualized, or shared, debt among

eurozone nations. They join many leading economists

and policymakers who see this as a solution to Europe’s

fragmented fiscal system.

Under a so-called eurobond scheme, eurozone countries

would issue joint bonds and collectively guarantee them.

By pooling eurozone lending, the nominal interest rate

on sovereign debt regardless of the issuing country would

coalesce around the weighted average rate of current

national bond issuances. This would imply, if using the

first seven months of 2011 as a basis, interest rates of

3.17 percent for two-year bonds and 4.41 percent for 10-

year bonds.100 This scenario would raise interest rates on

German bonds by between 1.34 percent and 1.73 percent,

representing an annual cost of between €33 billion and

€47 billion for Germany.101 But such a structure would

relieve the pressure on countries such as Italy and Spain,

which are struggling to maintain affordable access to bond

markets. They would use a eurozone-wide debt guarantee to

exploit the creditworthiness of their more financially robust

northern neighbors, especially Germany. A mutualized bond

would also be a highly liquid asset to rival Treasury bonds

as a reserve asset. This, in turn, would add to the bond’s

long-term attractiveness.

European Commission President José Manuel Barroso

proposed such “stability bonds” in his State of the Union

speech on September 28, 2011.102 These instruments,

Barroso said, would be “bonds that are designed in a way

that rewards those who play by the rules, and deters those

who don’t.”103 They would be designed for the daily financing

of eurozone governments through common issuance.

The Commission has devised three possible approaches for

mutualization:104

1)Fullmutualization:This plan would convert all national

government bonds to eurobonds backed by the 17 eurozone

countries. It would require treaty changes and would face

major political hurdles. Full mutualization would also be

unlikely to incentivize indebted member states to continue

with difficult reforms since it would shield them from the

market pressures that have spurred austerity measures and

structural reform over the past year and a half.

2) The Blue Bond Package: Eurozone countries

would issue common eurobonds to a certain limit (e.g.,

60 percent of their annual GDP). National governments

would be responsible for backing any additional debt that

they issue. This plan would also require treaty changes and

face political hurdles. It has nevertheless been championed

by many, particularly those in the think-tank community

who see it as an effective incentive to member states to

keep their debt below 60 percent of GDP. Any excess debt

issuance, dubbed “red bonds”, would be less creditworthy

and require a higher yield to balance investor risk.105 In the

long term, this could exert corrective pressure on member

states that would otherwise be tempted to allow debt to

exceed 60 percent.

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EUROBONDS: MUTUALIZATION OF SOVEREIGN DEBT “Eurobonds are not a short-term fix, but they could fill the gap left by the loss of confidence in government bonds generally.”- John Bruton, former Irish prime minister and former EU ambassador to the US, October 18, 2011

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3)Limitedguarantees: This third option would provide

some guarantees on newly issued bonds. Its structure

would be similar to that of the European Financial Stability

Facility (EFSF), although bond guarantees would be

readily available to states in non-emergency situations

as well. Limited guarantees would still likely lead to a

decline in creditworthiness since they would reflect the

creditworthiness of the nations that offer them.

The political hurdles to mutualizing debt lie first and

foremost in Germany. Chancellor Angela Merkel has

adamantly opposed the creation of eurobonds, not

least because Germany would risk its AAA rating if its

creditworthiness were pooled with the rest of the eurozone.

Speaking ahead of her December 2, 2011 Bundestag

address, she said that “I and the rest of the government

find eurobonds the wrong method in this stage of European

development, even damaging.”106 Germany sees the

introduction of a mutualized bond scheme as an undue

course to relieve pressure from governments currently

implementing politically difficult reform packages as a

result of rising borrowing costs. In addition, the German

Constitutional Court ruled in September 2011 against

eurobond issuance.107

Eventual mutualization has nevertheless not been ruled

out. EU Internal Market Commissioner Michel Barnier’s

prediction that “Germany will move [on eurobonds] as soon

as it has confidence in our capacity to manage together”

may yet come true.108

France has taken a public position similar to that of

Germany. French Budget Minister Valerie Pecresse has said

that eurobonds “would be the final stage of a process of

convergence. Right now there’s a consensus that the step

to take is repairing public finances.”109 Given the French

economy’s vulnerability, however, this position could

change if negative economic developments continue.

The IMF has consistently stated that now is not the right

time to consider eurobond issuance. Chief Economist

Olivier Blanchard has said, “Our position is that it would

be premature to implement [eurobonds] before a good

system of surveillance is in place.”110 Blanchard favors other

corrective measures not yet fully exhausted. ECB Executive

Board Member José Manuel Gonzalez-Paramo bluntly told

an audience at Oxford University, “I think eurobonds will

exist at some point.”111 The potential implementation of

eurobonds as a means of is seen my key participants as the

capstone of the fiscal union process.

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CONCLUSIONWith its implications for fiscal sustainability, competitiveness and financial markets in Europe and around the world, the

eurozone crisis is a global economic crisis. But more fundamentally, it is a political crisis. The ostensible power centers in

the EU have not upheld hallowed concepts, such as the community method or open coordination, that are enshrined in the

Treaties and high-minded communiqués. In reality, power is tucked away in national capitals that pursue their own interests.

That is a challenge for a system that is subject to vetoes from numerous states and institutions, many of which can derail

decision-making, and that is difficult for many Europeans to access and influence. Indeed, these are some of the EU political

system’s most endemic flaws.

The EU’s long-term legitimacy will require policymakers, central bankers, Commission officials and economists to bring

decision-making out of the shadows and subject it to the edifying check of democratic accountability. The question of what

Europe wants must ultimately be decided by the people of Europe themselves.

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THE UNITED KINGDOM

A somewhat dramatic coda to the December 2011 European

summit came with UK Prime Minister David Cameron’s

veto of an EU-based treaty change on fiscal coordination.

After an entire night of intense deliberation in which other

member states refused to accept British insistence on

single market opt-outs for the UK financial-services sector,

Cameron emerged in the morning to say that he had vetoed

the proposed changes to protect British national interests.

At home in London, the veto was lionized by the euroskeptic

boulevard press and the Tory party rank and file as a

demonstration of decisive leadership. But it was gleefully

derided in France and lamented in Germany whose

government sees the UK as a natural ally for the continuation

of market liberalization and fiscal rectitude. Either way, the

move has “plunged Britain’s position in Europe into the

greatest uncertainty in a generation.”112

The UK government has demonstrated since the veto that its

staunch opposition to a new treaty was not an apparition. It

has sustained its campaign against the new treaty, vowing to

block the eventual signatories of the agreement from using

EU institutions in its enforcement. This decision is having

a clear impact on the development of fiscal governance,

particularly regarding the role of the European Commission

and the European Court of Justice (ECJ) in enforcement.

The erosion of informal ties with pan-Europeanconservatives:Always an outsider in the European club,

the UK has accelerated the process of disentangling itself

from EU governance. Adroit policymaking in the highly

stylized negotiations of Brussels and Strasbourg requires

access to as many formal and informal halls of power as

possible. Having long recognized this, the UK, Poland and

other non-eurozone members – often derided as “outs”

by the political leadership of France and other eurozone

members – have sought to preserve their influence through

their role as informal observers to negotiating processes.

This takes place inside the Council, the formal negotiating

area, and outside in political caucuses, where party

groupings hammer out joint positions on issues before

European summits. The UK will be party to the negotiations

on the intergovernmental fiscal treaty.

In recent years and much to the dismay of some of its

most ardent advocates in Brussels – including its own

nationals – the Tory party under Cameron’s leadership

has broken many of the informal ties that linked his party

to the continental center-right. The most glaring example

of this was the Conservative party’s 2009 decision to pull

the Tories from the pan-continental European People’s

Party (EPP), a federation of center-right parties, and

to join instead an ideologically haphazard grouping of

euroskeptics, the European Conservatives and Reformists

(ECR). This decision has marginalized Tory members in the

European Parliament as evidenced by roles in leadership

and key committees. It also effectively barred Cameron from

attending EPP summits. The Marseilles EPP gathering on

the eve of the EU summit was seen as the moment in which

leaders such as German Chancellor Angela Merkel, French

President Nicolas Sarkozy, European Council President

Herman Van Rompuy and European Commission President

José Manuel Barosso – all of the center-right EPP – could

coordinate positions on treaty change. Some keen observers

have speculated that had Cameron not abandoned the EPP

in 2009, he would have had a clearer sense of the Franco-

German sentiment and been able to plan accordingly.

Splendidisolation:France, now pursuing a strategy that

maintains the dynamic that leaves the UK marginalized, is

pushing hard for passage of an EU-wide financial-transition

tax (FTT). Other leaders, including Merkel, have supported

such an initiative but only if implemented throughout the

eurozone or, optimally, the EU. The UK is strongly opposed

to an EU-wide FTT on multiple grounds and could again be

placed in a position to veto, perhaps alone.

A diminished actor in the world: One of the most

consequential examples of collateral damage from the

eurozone crisis has been its impact on the EU’s ability –

formally and informally – to project power in the world.113

Despite its Franco-British leadership and powers derogated

to it by the Lisbon Treaty, the much maligned European

External Action Service (EEAS) has suffered a still birth

since 2009.

The timing of the financial crisis could not be more

inauspicious for the EEAS, placing enormous pressure

on it to focus on financial and institutional wrangling in

Brussels and leaving it noticeably absent from such major

ANNEX I

“The European Community belongs to all its members. It must reflect the traditions and aspirations of all its members.”– Margaret Thatcher, The Bruges Speech on Britain and Europe, September 20, 1988

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geopolitical events as the Arab Spring and the Fukushima

Daiichi power plant disaster in Japan. The UK has the

largest defense budget in the EU and the region’s greatest

expeditionary capabilities. London is also one of the most

consistent advocates of the European presence in the

world. But the Cameron government has been clear in its

intent to rein in the EEAS’s power, going so far as to block a

meager €27 million increase in its budget.

The crisis has shown that role of the EU as a global actor

will remain relegated to its power as a “force multiplier”

in unconventional levers of power – humanitarian and

development aid, sanctions, regulation, and trade relations.

The pretense to a greater Europe-puissance has begun to

give way as this goal looking less realistic.114

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MAY 2, 2010 The European Central Bank, European

Commission, and the International Monetary Fund agree to

a €110 billion bailout package for Greece. Greece promises

austerity to cut its budget deficit to three percent of GDP

by 2014.

MAY 9, 2010 The 27 heads of EU member states agree

to create the European Financial Stability Facility (EFSF), a

legal instrument that provides funding assistance by solvent

eurozone countries for insolvent eurozone countries.

NOVEMBER 28, 2010 EU finance ministers approve

a €85 billion bailout package for Ireland that includes

funding from the EFSF (and its permanent mechanism,

the European Stability Mechanism (ESM)), the IMF, and

bilateral loans from the UK, Denmark, and Sweden. Ireland

promised austerity in return.

JANUARY 12, 2011 The European Commission adopts

the first Annual Growth Survey (AGS) and begins the

new annual cycle of economic harmonization and policy

coordination known as the European Semester.

MARCH24-25,2011 The European Council agrees on the

Euro Plus Pact, a strategy for competition and employment

growth that is obligatory for eurozone countries and

optional for the remaining EU members.

MAY16,2011 EU finance ministers approve a €78 billion

bailout package for Portugal that includes funding from the

EFSF, the ESM and the IMF.

JULY21,2011 At an EU summit, heads of state announce

the second bailout for Greece of €109 billion from the EFSF,

ESM and private investor losses. They also announce the

enlargement of EFSF from €440 billion to €780 billion,

which will require ratification by national parliaments.

OCTOBER 13, 2011 The enlargement of the EFSF is

finally ratified with approval by the Slovak parliament.

OCTOBER 26, 2011 At an EU summit, heads of state

announce plans to reduce Greece’s debt whereby private

investors take a greater loss (about 50 per cent) through

a voluntary agreement in exchange for safer debt. Leaders

also announce plans to recapitalize Europe’s banks at the

cost of €106 billion and create a €1 trillion firewall to

prevent the spread of contagion to larger, more solvent

eurozone countries.

NOVEMBER 8, 2011 The European Council adopts

the Six Pack measures, six proposals comprising the EU’s

economic governance package. The Six Pack amends and

strengthens the Stability and Growth Pact (SGP), introduces

a new Excessive Imbalances Procedure, and includes new

requirements for national budgetary frameworks.

NOVEMBER 9, 2011 Greek Prime Minister George

Papandreou resigns after a tumultuous week in the markets

spurred by his threat to put the country’s bailout conditions

to a referendum due to violent protests in the streets of

Athens over harsh austerity measures.

NOVEMBER 16, 2011 Italian Prime Minister Silvio

Berlusconi resigns after the Italian Parliament passed

austerity measures in light of soaring interest rates on

Italian debt. Technocrat Mario Monti succeeds him to lead

Italy towards more fiscal responsibility.

NOVEMBER 23, 2011 The European Commission

publishes a “Green Paper” on the feasibility of stability

bonds, a proposal for mutualizing debt among the eurozone

countries.

NOVEMBER 24, 2011 Italian Prime Minister Mario

Monti, French President Nicolas Sarkozy and German

Chancellor Angela Merkel meet in Strasbourg to discuss

Monti’s plan to balance Italy’s budget by 2013. They agree

to create plans for a fiscal union and to stay quiet on the

role of the ECB.

NOVEMBER 30, 2011 Eurozone finance ministers

agree on ways to boost the EFSF’s firepower through bond

guarantees and private investment. They also discuss IMF

involvement in boosting the fund.

ANNEX IITIMELINE FOR MAJOR DECISIONS TAKEN TO RESOLVE THE EUROZONE CRISIS

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DECEMBER 5, 2011 French President Nicolas Sarkozy

and German Chancellor Angela Merkel meet in Paris to

discuss plans for treaty change and automatic sanctions for

fiscal irresponsibility. They also request other EU leaders to

announce their positions on treaty change by the December

8-9 summit, so that measures can be in place by March

2012.

DECEMBER8-9,2011 The EU summit focuses on plans

for a fiscal compact, to which 26 EU member states agree.

UK Prime Minister David Cameron refuses to support it,

thereby blocking potential treaty change. ECB President

Mario Draghi resists notions that the bank would intervene

in sovereign-debt markets. Eurozone and EU leaders agree

to contribute €150 billion in bilateral loans to the IMF to

support global financial stability.

JANUARY 9, 2012 French President Nicolas Sarkozy

and German Chancellor Angela Merkel meet in Berlin to

prepare for the January 30, 2012 EU summit. They praise the

progress of the fiscal compact-drafting process and launch

a strategy to revive economic growth and job creation in a

further effort to combat the eurozone’s debt problem. They

also urge the expedition of Greek debt restructuring.

JANUARY 30, 2012 Another EU summit in Brussels

is scheduled to discuss solutions to the crisis. Under

consideration is a draft of the guidelines for a fiscal compact.

MARCH1,2012The 26 EU member states are expected

to sign on to a new fiscal compact. Eurozone leaders re-

assess the adequacy of the ESM/EFSF €500 billion ceiling.

JULY 2012 The European Stability Mechanism (ESM)

enters into force and the EFSF ceases to negotiate new

programs.

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1 Beschluss des 24. Parteitages der CDU Deutschlands: Starkes Europa – Gute Zukunft für Deutschland. Pg. 8.2 Die Schuldenbremse – für die Zukunft unserer Kinder. Federal Republic of Germany. 2010, retrieved online : http://www.bundesregierung.de/Content/DE/__Anlagen/2010/schuldenbremse-infografik-textversion,property=publicationFile.pdf3 Informationsgemeinschaft zur Feststellung der Verbeitung von Webeträgern e. V., retrieved online : http://www.ivw.de/4 Bild-Zeitung, Oct. 27, 2010; Bild-Zeitung, June 6, 2011.5 “Is this really the end?” in: The Economist, London. November 26th, 2011, retrieved online : http://www.economist.com/node/215402556 The GfK Group, retrieved online : http://www.gfk.com/7 Ifo Business Survey December 2011. Retrieved online at: http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk8 “Germany’s unemployment rate at record low in December.” In BBC Online. Retrieved online at: http://www.bbc.co.uk/news/business-163904299 Schultz, Stefan. „Europas Krise, Deutschlands Segen“ in Spiegel Online. January 9, 2012. Retreived online at: http://www.spiegel.de/wirtschaft/soziales/0,1518,808010,00.html10 Auction Result: treasury discount paper of the Federal Republic of Germany. January 9, 2012. Retrieved online at: http://www.bundesbank.de/download/presse/pressenotizen/2012/20120109.tenderergebnis.en.pdf11 In May 2010, the CDU attempted to use a hard line on Greece to push up its poll numbers in North-Rhine Westphalia. In August 2011, the FDP attempted to profile itself as a Euro-skeptic force. Both strategies backfired with the CDU losing 10.3% of its support and control of the government and the FDP garnering a paltry 1.8%. 12 Wohlgemuth, Michael. “Kant was No Stickler for Principles” in: What does Germany Think About Europe? Ulrike Guerot and Jacqueline Henard (eds). June 2011. Pg.13. 13 Schmid, John. “German Slump Prompts Push for Lower Rates: Schroeder Urges the ECB to Focus on Growth, Too.” The New York Times, June 30, 2001, retrieved online : http://www.nytimes.com/2001/06/30/business/worldbusiness/30iht-ecb_ed3__1.html 14 Beschluss des 24. Parteitages der CDU Deutschlands: Starkes Europa – Gute Zukunft für Deutschland15 The US Federal Reserve has a dual mandate of inflation targets and employment. Lowering interest rates can create inflationary pressure, which helps to create jobs because businesses are more likely to spend and grow. Additionally, it could depreciate the currency which would boost exports.16 Marsh, David. The Euro: The Battle for a New Global Currency. New Haven. 2009. pg. 217. 17 Speech by Mario Draghi, November 3, 2011. Retrieved online : http://www.ecb.int/press/key/date/2011/html/sp111201.en.html 18 Angela Merkel was the one who publically broached the possibility of departure of Greece from the eurozone. 19 Speech by Mario Draghi, Hearing before the European Parliament on the Occasion of the ECB’s 2010 Annual Report, December 1, 2011. Retrieved online at: http://www.ecb.int/press/key/date/2011/html/sp111201.en.html20 Atkins, Ralph and Hugh Carnegy. “Draghi hints at eurozone aid plan,” Financial Times, December 1, 2011. 21 Marsh, 227. 22 Draghi, December 1, 201123 Article 123, Treaty of the European Union, retrieved online : http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html24 Speech by Christian Wulff. Lindau Nobel Laureate Meeting. August 24, 2011. Retrieved online : http://www.lindau-nobel.org/upload/2011_08_24_Opening_Speech_Wulff_English_6252.pdf 25 Mahler, Armin. „Maßgeschneidertes Trostpfaster,“ Spiegel Online. January 3, 2012. Retrieved online at: http://www.spiegel.de/wirtschaft/unternehmen/0,1518,807005,00.html26 Taylor, Paul. “Euro Zone Leaders May Have to Accept Tighter Union.” New York Times, November 28, 2011. Retrieved online : http://www.nytimes.com/2011/11/29/business/global/euro-zone-leaders-may-have-to-accept-tighter-union.html27 Eurostat. Retrieved online : http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics28 Trading Economics. Retrieved online : http://www.tradingeconomics.com/germany/gdp-growth29 Barker, Tyson. “Flexicurity in Europe’s Labor Market” in: Policy Matters, Volume 4, No. 2, 2007. Berkeley. Retrieved online : http://policymatters.net/issue/PolicyMatters_Spring_2007.pdf30 France’s Loi Aubry limits weekly working hours to 35. 31 IMF Stability Report on France, November 2011. Retrieved online : http://www.imf.org/external/np/country/2011/mapfrance.pdf 32 Speech by Nicolas Sarkozy. Toulon, France. December 1, 2011. Retrieved online : http://www.elysee.fr/president/les-actualites/discours/2011/discours-du-president-de-la-republique-a-toulon.12553.html33 Ibid. 34 Treaty of the European Union, retrieved online : http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html35 The Europe 2020 strategy’s predecessor, the Lisbon Agenda, set forth a series of targets to create a European knowledge-based economy that was meant to be the world’s most competitive. Green Paper on the feasibility of introducing Stability Bonds, European Commission. November 23, 2011. Retrieved online : http://ec.europa.eu/commission_2010-2014/president/news/documents/pdf/green_en.pdf36 The Commission has a two-pronged mission in Greece: It wants to establish investment projects aimed at maintaining demand and employment, and it aims to expedite the injection of €15 billion of structural funds. Its informal influence has also increased by staffing the ministries across the region have been seconded from the Commission to help distressed countries meet targets set by the troika. Questions and Answers on the Task Force for Greece. European Commission website. September 13, 2011. Retrieved online : http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/599&format=HTML&aged=0&language=EN&guiLanguage=en 37 As President Barroso stated: “It was an illusion to think that we could have a common currency and a single market with national approaches to economic and budgetary policy. Let’s avoid another illusion that we can have a common currency and a single market with an intergovernmental approach.”38 These bonds are not referred to as “eurobonds” because they are guaranteed by individual member states rather than the collective euro zone. Some argue, however, that this is a façade and they are essentially Eurobonds. See: De le Dehesa, Guillermo. “Eurobonds: Concepts and Implications,” European Parliament, March 2011, retrieved online: http://www.europarl.europa.eu/document/activities/cont/201103/20110317ATT15734/20110317ATT15734EN.pdf).39 EFSF Framework Agreement, retrieved online: http://www.efsf.europa.eu/attachments/20111019_efsf_framework_agreement_en.pdf. In November, the interest rate on EFSF loans reached 9 per cent in Ireland. Reddan, Fiona. “Ireland’s funding costs start rising again,” Irish Times November 26, 2011, retrieved online: http://www.irishtimes.com/newspaper/finance/2011/1126/1224308179040.html).40 See EFSF Framework Agreement.41 The Solidarity Clause of the Maastricht Treaty provided the legal basis for the financial stability amendment. The provision was originally intended to allow for intra-governmental assistance in the midst of natural or man-made disasters. See De Witte, Bruno. “The European Treaty Amendment for the Creation of a Financial Stability Mechanism,” Swedish Institute for European Policy Studies Bepa: June 2011, retrieved online: http://www.eui.eu/Projects/EUDO-Institutions/Documents/SIEPS20116epa.pdf. 42 The ESM will be established as an intergovernmental organization under public international law. See the European Council’s website at: http://www.european-council.europa.eu/eurozone-governance/features/feature151211-moving-towards-fiscal-union.43 Peel, Quentin and Peter Spiegel. “Devil’s in detail of Sarkozy-Merkel deal.” Financial Times December 6, 2011, retrieved online: http://www.ft.com/intl/cms/s/0/30aba180-2040-11e1-9878-00144feabdc0.html#axzz1frbFkoZd. 44 The European Council’s fact sheet on the adjustment program for Greece, retrieved online: http://www.european-council.europa.eu/media/443140/27.10.11-greece-factsheet.pdf.45 Valée, Shahin. “There is no such thing as EFSF leverage without the ECB,” Bruegel October 19, 2011, retrieved online: http://www.bruegel.org/publications/publication-detail/publication/621-there-is-no-such-thing-as-efsf-leverage-without-the-ecb/. 46 The EFSF website, found at: http://www.efsf.europa.eu/mediacentre/news/2011/2011-015-maximising-efsfs-capacity-approved.htm. 47 “Netherlands, Finland favor strengthening IMF role as they improve euro defenses,” Washington Post November 25, 2011, retrieved online: http://www.washingtonpost.com/business/markets/poll-germans-strongly-against-eurobonds-approval-of-merkels-crisis-management-rising/2011/11/25/ gIQANZaNvN_story.html48 Armitstead, Louise and Jonathan Russell. “Christine Lagarde: IMF may need billions in extra funding,” The Telegraph September 25, 2011, retrieved online: http://www.telegraph.co.uk/finance/financialcrisis/8788223/Christine-Lagarde-IMF-may-need-billions-in-extra-funding.html

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49 In August 2011, Daniel Gros, director of the Centre for European Policy Studies (CEPS), the Brussels-based think tank, and Thomas Mayer, Deutsch Bank chief economist released a paper that proposes to register the EFSF as a bank (called the European Monetary Fund (EMF)), which would give it access to potentially unlimited amounts of ECB re-financing in case of an emergency. The EMF would have access to the ECB like other banks have; the ECB acts as a lender of last resort for eurozone central banks. The authors tout this idea for three reasons: It works around the EU Treaty’s prohibition of ECB monetary financing, it could effectively increase much- needed EFSF liquidity, and it does not require additional taxpayer money. See: Gros, Daniel and Thomas Mayer. “Refinancing the EFSF via the ECB,” CEPS. August 18, 2011. 50 Speech by Christine Lagarde. “Global Risks are Rising, but there is a Path to Recovery”: Remarks at Jackson Hole. August 27, 2011, retrieved online: http://www.imf.org/external/np/speeches/2011/082711.htm. 51 “No big bazooka,” The Economist October 29-November 4, 2011. 52 “A nuclear winter? The fallout from the Bankruptcy of the Lehman Brothers,” The Economist September 18, 2010, retrieved online: http://www.economist.com/node/12274112. 53 Unicredit Strategic Plan, retrieved online: http://www.unicreditgroup.eu/en/pressreleases/PressRelease1753.htm. 54 Press Release, European Banking Authority, December 8, 2011, retrieved online at: http://stress-test.eba.europa.eu/capitalexercise/Press%20release%20FINALv2.pdf. 55 See letter text on the blog of the co-author, Sony Kapoor: http://www.re-define.org/blog/2011/11/28/need-pan-eu-funding-support-banks. 56 Please see: Véron, Nicolas. “Europe Must Change Course on Banks,” Peterson Institute for International Economics December 19, 2011, retrieved online at: http://www.piie.com/realtime/?p=2581. 57 Orphanides, Athanasios. “New Paradigms in Central Banking?” Working Paper 2011-6, Central Bank of Cyprus Working Paper Series. Nicosia: Central Bank of Cyprus, November 2011. Retrieved online. www.centralbank.gov.cy/media/pdf/NPWPE_No6_112011.pdf 58 “EU governance by self-coordination? Towards a gouvernement économique.” European Commission Report, August 2004. Retrieved online. http://cordis.europa.eu/documents/documentlibrary/100124131EN6.pdf. 59 Communication from the European Commission. “Europe 2020: A strategy for smart, sustainable and inclusive growth.” Brussels, 3.3.2010. Retrieved online. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF 60 “Stability and Growth Pact and Economic Policy Coordination.” Summary of EU Legislation, Economic and Monetary Affairs, Retrieved online at: http://europa.eu/legislation_summaries/economic_and_monetary_affairs/stability_and_growth_pact/index_en.htm61 The first arm of the SGP, the preventative arm, required member states to submit annual plans to the Commission that laid out how they would maintain their “sound fiscal positions” vis-à-vis their national economic policies. These plans were in turn assessed by the Commission, and then ultimately judged by the Council. If the judgment of the Council was that any member state appeared to be in jeopardy of losing its sound fiscal position, the Council could issue a warning (in conjunction with the Commission providing pointed policy advice) to the offending member state, in the hopes that doing so would prevent that state from getting into excessive deficits. The second arm of the SGP, the dissuasive arm, established a mechanism whereby any member state whose deficits ran over 3% of GDP/Debt:GDP ran over 60% (and thus was in Treaty violation) would be called out for excessive deficits, given a set of policy recommendations by the Council on how to course-correct its fiscal trajectory, and provided with a specific time frame in which to bring itself back to the firmer footing of deficits below the 3% threshold. Any state failing to act on the Council’s recommendations would be subject to “further proceedings”, which for eurozone states also included the possibility of sanctions.62 Blanchard, Olivier and Francesco Giavazzi. “Improving the Stability and Growth Pact Through Proper Accounting of Public Investment,” in Fiscal Policy, Stabilization and Growth Pact: Prudence or Abstinence?, edited by Guillermo Perry, Luis Servén, and Rodrigo Suescún. Washington DC: The World Bank, 2008. 259.63 Savage, J.D. and Verdun, A. “Reforming Europe’s Stability and Growth pact: Lessons from the American Experience in Macrobudgeting”, Review of International Political Economy 14(5). 2007. 842– 867. 64 Alves, Rui Henrique and Óscar Afonso, “The “New” Stability and Growth Pact: More Flexible, Less Stupid?” FEP Working Paper Series, June 2006. 6.65 Dutzler, Barbara and Angelika Hable, “The European Court of Justice and the Stability and Growth Pact – Just the Beginning?” European Integration online Papers (EIoP) Vol. 9 (2005):5. Retrieved online. http://eiop.or.at/eiop/pdf/2005-005.pdf 66 José Manuel Barroso, press conference unveiling the first Annual Growth Survey (AGS). Brussels, January 12 2011. Speech retrieved online. http://www.youtube.com/watch?v=UvRBC8jxkh4 67 “Monitoring progress through the European Semester.”Europe 2020 website. Retrieved online. http://ec.europa.eu/europe2020/reaching-the-goals/monitoring-progress/index_en.htm 68 “In order to ensure the proper functioning of EMU, euro area Member states are under a particular obligation to regard their economic policies as a matter of common concern due to the potential for spillover effects among countries sharing a common currency. Therefore, a more comprehensive and permanent overhaul of economic policy coordination at the EU and euro area level has proved necessary in light of the crisis and the current challenges.” Council Recommendation of 12 July 2011 on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro. Official Journal C 217, 23/07/2011 P. 0015 – 0017.69 Using the AGS as the foundation for the semester more broadly, and taking its policy advice into account as the basis for developing policy goals moving forward more specifically, member states then draft their National Reform Programs (NRP) along with their Stability or Convergence Programs, to reflect the advice offered in the AGS. The two documents each member state produce based on the AGS will be presented to the Commission for assessment. Thereafter, the Council (based on the Commission’s assessment) will return to each member state a tailored set of specific guidelines, which in turn are to be used in the shaping of national budgets in the second half of the year. Actually implementing the specific guidelines as they appear in the Council’s recommendation and incorporating them into their national policies is, however, optional. States still maintain their rights to policy and budget formulation without EU influence. There is also no direct punitive consequence built into the European Semester itself that results from a member state deciding not to base its national policy around the Council’s suggestions – although punitive measures are built into other legislative arms of the overall economic governance package that now seeks to redefine the SGP. European Commission. Retrieved online. http://ec.europa.eu/economy_finance/een/019/article_88106_en.htm; The European Semester comprises an annual, six-month cycle in economic policy coordination among all 27 member states that starts in January and finishes in June/July. It begins with the Annual Growth Survey (AGS), a report in which the Commission analyzes the Union based on the progress made towards Europe 2020 targets, a macro-economic report, and the joint employment report. The AGS applies to the EU as a whole, but is also individualized; it is meant to change the way national governments shape their economic and fiscal policies. Member states are encouraged to draft their budgetary and structural reform plans according to AGS recommendations and conclusions, taking an interest in their neighbors’ economic well-being as well as their own. The Commission is to monitor progress towards commonly agreed goals throughout an initial period. The first six months of each year are thus meant to act as a back-and-forth between member states and European institutions (Commission and Council), during which time policy interdependencies are to be identified, and general and country-specific recommendations are made. This is done before national parliaments meet to make policy decisions in the second half of the year.70 Hallerberg, Marzinotto and Wolff, 8-9.71 Europe 2020 website. Retrieved online. http://ec.europa.eu/europe2020/reaching-the-goals/monitoring-progress/index_en.htm 72 A National Reform Program is a set of objectives and measures identified by EU member states that need to be taken in order to achieve budgetary targets and the correction of excessive budget deficits. National Reform Programs enable member states to identify the setting of national targets under the “Europe 2020 Strategy”, as well as undertake growth strategy measures for development, employment and social stability. They are not, in and of themselves, budgets, as much as they are a plan for establishing a framework upon which budgetary goals should be based, and which informs the creation of a national budget. As may be implicit in the titles, Stability Programs are submitted by eurozone states, whereas Convergence Programs are submitted by non- eurozone states. Both are comprised of measures respective member states pledge to undertake in order to stabilize their public finances.73 Hallerberg, Mark, Benedicta Marzinotto, Guntram B. Wolff. “How Effective and Legitimate is the European Semester? Increasing the Role of the European Parliament.” Briefing Paper for the European Parliament. Brussels: European Parliament, August 2011.74 Ibid.75 Herman van Rampuy, press conference unveiling the Euro Plus Pact. Brussels, March 25, 2011. Speech retrieved online. http://www.youtube.com/watch?v=Vfy8B0rckp0&feature=relmfu 76 Press release of the European Union, “Conclusions of the European Council (24/25 March 2011). Retrieved online. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf77 Policy areas subject to convergence include: reducing the cost of labor and increasing productivity by reducing centralized bargaining and decreasing public wages; increasing long term, and especially youth, employment; reforming public finances by limiting government liabilities; controlling levels of private debt; coordinate corporate tax policy; all of these must now be coordinated and aligned between member states across the EU.

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78 Rennie, David, “The Divisiveness Pact. Charlemagne Column, The Economist, March 10, 2011. Retrieved online. http://www.economist.com/node/18330371 79 http://www.novinite.com/view_news.php?id=12662680 Press release of the European Union, “Conclusions of the European Council (24/25 March 2011). Retrieved online. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf; “’Euro-plus pact’ divides non-eurozone members.” Euractiv, March 25, 2011. Retrieved online. http://www.euractiv.com/euro-finance/euro-plus-pact-divides-non-eurozone-members-news-503526 81 The OpenMethodofCoordinationis a relatively new method of coordination within the EU designed to help Member States progress jointly in the reforms they needed to undertake in order to reach the Lisbon goals. It consists of fixing guidelines/timetables, indicators & benchmarkes, translating guidelines into national and regional policies, and periodically monitoring progress in order to help engender mutual learning processes among/between member states.82 Gros, Daniel. “Sense and Nonsense of the Euro Pact Plus,” in The Contribution of 16 European Think Tanks to the Polish, Danish and Cypriot Trio Presidency of the European Union. Brussels: Notre Europe, June 2011. 83 Verhofstadt, Guy. “Can the euro survive Merkel, Sarkozy and Barroso?” MEPs Corner. Retrieved online. http://www.alde.eu/alde-group/meps-corner-news/meps-corner-details/article/can-the-euro-survive-merkel-sarkozy-and-barroso-37453/ 84 José Manuel Barroso, State of the Union Address, Strasbourg, September 28, 2011. Retrieved online. http://ec.europa.eu/commission_2010-2014/president/pdf/speech_original.pdf 85 1) Regulation amending regulation 1466/97 (from July 1997, regarding the strengthening of surveillance of budgetary positions and the surveillance and coordination of economic policies): from now on, budget plans will be sent to the Commission as part of the European semester; countries are not allowed to increase spending by more than their average GDP growth; failure to reach mediumtermbudgetobjectives(MTOs) result in initial warning, penalties of 0.2% of GDP after 7 months (requires only simple majority vote). This is the “preventative arm” of the economic governance package; 2) Regulation amending regulation 1467/97 (from July 1997, regarding speeding up and clarifying the implementation of the excessive deficit procedure): countries in violation of 60% of GDP debt limit will have to reduce debt by at least 0.5% on average over 3 years or face penalties of 0.2% of GDP (only overturned by qualified majority vote). This is the “corrective arm” of the economic governance package; 3) Regulation on fines for deficit countries: regulation setting out a range of fines for eurozone countries under the excessive debt procedure. Countries flouting MTO requirements/EU debt limits are subject to fines ranging from 0.2-0.5% of GDP; difference over SGP is that now fines will actually be enforced. Similar penalties for countries that falsify debt information; 4) Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area: when a country fails to abide by Commission recommendations or make reforms to eliminate excessive imbalances, it will be fined up to 0.1% of GDP annually. Overturned only by qualified majority vote; 5) Regulation on the prevention and correction of macroeconomic imbalances: sets up a monitoring system for imbalances – public and private indebtedness, house prices, unemployment, current account balance, real effective exchange rates, etc. Those crossing the threshold are subject to a review by the Commission. If imbalances are found, the country must submit a corrective plan. If after six months and two warnings no progress is made, the country can be fined up to 0.1% of GDP. Overturned by reverse qualified majority vote; 6) Directive on the requirements for the member states’ budgetary frameworks: this establishes statistical and budgetary standards – such as that state accounts should be published monthly, debt and deficit limits should be written into law, budget planning should be done over three years, independent auditors should check all government accounts. 86 Very similar in its approach and structure to the SGP, these measures have two primary arms: preventative (action through warnings) and corrective (action through sanctions and fines levied as a % of GDP). Member states must enact policies that are as fiscally prudent as possible, regardless of how rosy their economic situation is compared to their European neighbors. Failure to meet the agreed upon standards will result in sanctions. In addition to this, and as outlined in the European Semester and the EPP, budget developments are followed more closely than in the past, subject to oversight by the Commission and ultimate judgment by the Council.87 Kundnani, Hans. “Germany as a geoeconomic power.” European Council on Foreign Relations website. Retrieved online. http://ecfr.eu/content/entry/commentary_germany_as_a_geoeconomic_power 88 EU Press Release, “EU Economic Governance: A Big Major Forward”. Retrieved online. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/364&format=HTML&aged=1&language=EN&guiLanguage=en 89 COM(2011) 821 final 2011/0386 (COD) – “Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area.”; COM(2011) 819 final - 2011/0385 (COD) – “Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area.”90 European Commission, Press Release (MEMO/11/822), 11/23/2011. “Economic governance: Commission proposes two new Regulations to further strengthen budgetary surveillance in the euro area.”91 Ibid. 92 In a December 1, 2011 speech in Toulon, Sarkozy stated, “It is not by going down the path of more supranationality that Europe will be relaunched.” Carnegy, Hugh. “Sarkozy reluctant to cede key powers,” Financial Times, December 1, 2011, retrieved online: http://www.ft.com/cms/s/0/b23b95ec-1c2c-11e1-9631-00144feabdc0.html#axzz1fCcoTR1L). 93 Harris Interactive website: http://www.harrisinteractive.fr/ 94 Carnegy, Hugh. “France and Germany agree new rules,” Financial Times, December 5, 2011, retrieved online: http://www.ft.com/intl/cms/s/0/d0d39098-1f53-11e1-90aa-00144feabdc0.html?ftcamp=rss#axzz1ffkvqh5F 95 “Draft treaty changes soothe Parliament,” Euractiv, January 13, 2012, retrieved online at: http://www.euractiv.com/future-eu/draft-treaty-changes-soothe-parliament-news-510120 96 Spiegel, Peter, Gerrit Weismann and Robin Wigglesworth, “S&P Downgrades France and Austria,” Financial Times, January 14, 2012, retrieved online at: http://www.ft.com/intl/cms/s/0/78bf6fb4-3df6-11e1-91f3-00144feabdc0.html#axzz1jjalSmhN. 97 The Irish Constitution requires a referendum in case of EU treaty change. For background, see: Kelly, Meghan. “The Latent Power of the Irish Referendum,” B|Brief Bertelsmann Foundation: December 15, 2011, retrieved online at: http://www.bfna.org/publication/the-latent-power-of-the-irish-referendum. 98 Pop, Valentina. “More power for EU commission in new draft of fiscal treaty,” EU Observer, January 6, 2012. retrieved online at: http://euobserver.com/19/114777. 99 “EU Rehn: Treaty Changes Should be Based on Current Framework“ Wall Street Journal, November 30, 2011, retrieved online: http://online.wsj.com/article/BT-CO-20111130-709777.html100 What will Eurobonds cost? Position of the Institut für Wirtschaftsforschung (Ifo). August 17m 2011. Pg. 4. 101 What will Eurobonds cost? Position of the Institut für Wirtschaftsforschung (Ifo). August 17m 2011. Pg. 4. 102 Transcript retrieved online at: http://ec.europa.eu/commission_2010-2014/president/pdf/speech_original.pdf 103 ibid. 104 European Commission website: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/820&format=HTML&aged=0&language=EN&guiLanguage=en 105 Delpla, Jacques and Jakob von Weizsäcker. “Eurobonds: The Blue Bond Concept and its implications,“ Bruegel Policy Contribution. March 2011. 106 Scally, Derek. “Merkel says she will not barter on eurobonds,” Irish Times, December 2, 2011, retrieved online at: http://www.irishtimes.com/newspaper/world/2011/1202/1224308475202.html. 107 Under Art. 110 of the German constitution, the Bundestag enjoys full fiscal sovereignty, and this right was reaffirmed by the Constitutional Court as an essential parliamentary control of the executive. While the court accepts a partial transfer of decisions to the level of the EU, the parliament must retain a minimum set of rights to ensure democratic decision making. Eurobonds constitute a fundamental breach of this principle.108 “Germany will move on eurobonds, says Barnier,” EUobserver, November 23, 2011, retrieved online at: http://euobserver.com/1016/114332. 109 “Sentiments Higher on New Options of Eurobonds,” International Business Times, September 15, 2011, retrieved online at: http://www.ibtimes.com/articles/214148/20110915/sentiment-higher-on-new-options-of-eurobonds.htm 110 Rastello, Sandrine. “IMF’s Blanchard Says It’s ‘Premature’ to Issue Euro Bonds,” Bloomberg, September 20, 2011, retrieved online at: http://www.bloomberg.com/news/2011-09-20/imf-s-blanchard-says-it-s-premature-to-issue-euro-bonds.html. 111 “ECB’s Gonzalez-Palermo: Eurobonds to exist at some point,” Reuters, November 24, 2011, retrieved online at: http://www.reuters.com/article/2011/11/24/us-ecb-eurobonds-idUSTRE7AN1YU20111124 112 Traynor, Ian, et al. “David Cameron blocks EU treaty with veto, casting Britain adrift in Europe,” The Guardian, December 9, 2011. Retrieved online at: http://www.guardian.co.uk/world/2011/dec/09/david-cameron-blocks-eu-treaty113 “EU Foreign Policy must not become a casualty of the Euro Crisis” Open letter. December 16, 2011. Retrieved online at: http://euobserver.com/7/114664114 Corn, Tony. “Toward a Gentler, Kinder German Reich? The Realpolitik behind the European Financial Crisis. In: Small Wars Journal, November 29, 2011.

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