With the European Debt crisis already crippling Greece, Italy, and Spain, European nations have been scrambling for a plan to restore market confidence before the eurozone region slides back into recession. The eurozone has reached the lowest growth rate since its exit from the recession two years ago as gross domestic product inched a mere 0.6% in the third quarter. Although Germany’s economy posted a 2% annualized growth rate and France noted a 1.6% growth rate, other countries in the eurozone account for just half of the eurozone GDP and have been faced with contracting economies.
Germany had originally proposed a limited treaty change among all 27 EU nations to enforce tighter budget constraints by the end of 2012. “The Germans have made up their minds,” one senior EU official told Reuters. “They want treaty change and they are doing everything they can to push for it as rapidly as possible.” However, while Germany is striving for rapid change, many EU nations like Greece, Italy, and Spain will not be able to adopt immediate restructuring. Consequently, German Chancellor Angela Merkel and French President Nicolas Sarkozy have directed their attention to the 17 nations in the eurozone region to outline a proposal that takes after the Schengen III treaty that was initially signed by only 7 members of the EU with 5 other nations joining soon after. Another possible model that has been tossed around is the creation of a mini-agreement between Germany and France alone; Sarkozy had recently acknowledged the possibility of a two-speed Europe.
To combat the crisis, the European Commission is in support of common eurozone bonds among the 17 nations. Supporters of the plan argue that the “stability bonds” would bring back fiscal credibility to all eurozone nations, however, Germany and the European Central Bank have protested against the use of common eurozone bonds. While Merkel is in support of immediate radical changes and fiscal integration, she believes that if implemented too early, the eurozone bonds will only face failure. Moreover, others have also argued that common bonds will drag down the hard-earned reputation for countries like Germany increase the cost of borrowing for those who have worked hard to achieve low loan rates.
Although many are enthusiastic that the European nations are striving towards long-term changes to their financial systems, the market has yet to respond positively. Rumors of these forming plans are not enough to instill confidence within the market as seen by investors’ refusal to leave the safety of U.S. treasuries. Despite the urging of many eurozone countries, the European Central Bank has refused to intervene with bonds and has consistently upheld its conservative policy. With ongoing debates and no signs of compromise, many can only watch nervously and hope that the market plays out to prevent the collapse of the euro.
Photo Credit: Bloomberg News