The euro zone will probably get another short-term fix at its summit this week. Exactly how the fix will work isn’t clear. But both Germany and the European Central Bank have softened their positions so much that some sort of solution is in the works. The ECB will probably cut interest rates and spray more liquidity at the troubled banking system; it may also step up its purchases of government bonds; and some scheme for assembling enough money to bail out Italy and Spain — probably by getting national central banks to lend money to the International Monetary Fund, which could then pass it on to Rome and Madrid – may be unveiled.
All this would be cause for celebration. The problem is the price that Germany and seemingly the ECB are demanding for their help: fiscal discipline, embedded in a treaty. Merkel wants the European Commission in Brussels to have the power to overturn irresponsible national budgets and for the European Court of Justice to fine governments that step out of line.
This idea for a treaty is stirring up all sorts of problems. One is that Britain, which is not part of the euro zone but is a member of the European Union, wants a quid pro quo for signing a revised treaty – probably in the form of returning powers over social and judicial affairs to London or getting some veto over the regulation of financial services, the UK’s largest industry.
An even bigger problem is the objection of many people in the euro zone to Disziplin being imposed by Berlin. Even France’s Nicholas Sarkozy, who is backing Merkel’s plan, has had to swallow hard before embracing a policy which would involve a loss of sovereignty, and is still wrangling over the details. The opposition socialists, which look likely to defeat Sarkozy in May’s presidential elections, have been quick to dub the plan an “austerity treaty.”
Handing powers to Brussels at Germany’s insistence isn’t popular with France’s right-wing parties either. In fact, it is likely to be pretty unpopular right across the euro zone. Even the president of the European Parliament, a body which normally supports anything that increases the European Union’s power, has said treaty change could be “dangerous” because citizens were unlikely to warm to the idea.