New ideas?

German Chancellor Angela Merkel kept it vague during her address to the lower house of parliament on Friday. Reforms to the European Union treaties wouldn't come as a thunderbolt of change, she said, but would instead be the result of lengthy debates and discussions. That wasn't exactly the message the financial markets were hoping for.

Merkel's partner in the eurozone rescue effort, French President Nicolas Sarkozy, kept his keynote address in Toulon on Thursday similarly ambiguous. A strong, stable fiscal union with strict rules is the motto of both leaders, whose names the French media have merged into "Merkozy."

A fiscal union with the power to control the budgets of individual member countries certainly could have nipped the causes of the crisis in the bud. But changes to the EU treaties won't do much to fix the current crisis, which threatens to destroy the eurozone.

Merkel's government now seems willing to tolerate continued massive government bond purchases by the European Central Bank. The ECB is currently the only institution with the power to lower the interest rates for those heavily indebted countries. This week, for the first time, the ECB began purchasing government bonds with money it created for that purpose. The ECB is printing money to buy Italian and Spanish bonds. In the end that will lead to inflation and a currency devaluation.

Merkozy, however, have not been as candid on the issue as their finance ministers were at the beginning of the week when they admitted that the eurozone's bailout fund, the European Financial Stability Facility (EFSF), was too small to rebuild trust in European government debt. The International Monetary Fund has to be involved too, because there still isn't a "European Monetary Fund." This strong, stable fiscal union that Merkel and Sarkozy have proposed could have existed a year ago. The European Commission proposed just such an idea, which Merkel and Sarkozy rejected at the time.

Whether the other eurozone countries, let alone all 27 EU members, can be convinced of this newest incarnation is questionable. Meanwhile the crisis in the banking sector and the reluctance of banks to lend is growing, and yet no word from Merkel or Sarkozy on that.

They seem ready to take the lead and to seek a new start for the eurozone, yet their proposals don't go very far. The agreements from the last summit, at the end of October, have all either fizzled out or are yet to be implemented. The banks' agreement to cut Greece's debt has not yet been negotiated. The recapitalization of banks will take until at least next summer. The expansion of the EFSF has not worked out. And the talked-up firewall to keep debt contagion from spreading to other euro countries has not been built.

Merkel and Sarkozy continue to play for time. They say that only when the control over individual budgets is brought together in a centralized EU institution will they agree to a pooling of European debt. That could take many months. Until then the ECB will have to continue to take on these unsellable government bonds. This approach could also be described as a pooling of debt, because it makes all of the euro countries liable for those bonds. Merkel would rather not admit that, however, because it would contradict her strong stance against eurobonds.

Neither Merkel's nor Sarkozy's speeches included anything particularly new. The only hope now is that something will come out of their meeting on Monday in Paris. If no new solutions are presented, the EU will lose credibility internationally; its growing existential crisis will make it seem incapable of action.

It is time for a declaration from the eurozone countries that they will defend their currency with every means available or give up this currency union experiment. It's time for a straightforward declaration to the citizens of the EU that they will all have to pay for these countries' debt overload. And that means that their incomes will slowly lose value and their taxes will rise.

Author: Bernd Riegert / hf
Editor: Andreas Illmer