PARIS (MNI) – Germany and France foresee the possibility that
Eurozone governments with public deficits over 3% of GDP could face an
accelerating loss of sovereignty to EU authorities in order to redress
their finances, according to an official document released Tuesday.

A letter from German Chancellor Angela Merkel and French President
to the president of the European Council, Herman Van Rompuy, proposes
that “automatic” sanctions be imposed “unless a qualified majority of
the Eurogroup decides otherwise.”

However, “exceptional circumstances should be taken into account,”
the leaders added, perhaps referring to cyclical swings in the economy.

A government with an excessive deficit would have to reach an
accord with the European Commission and other Eurozone governments on
budgetary and structural measures “to allow it to overcome its
difficulties and to aid it in its efforts.”

“A series of interventions in the legislation of that country, of
mounting intensity, could be authorized as a targeted response to an
excessive [deficit],” the letter says. “The steps and sanctions proposed
or recommended by the Commission should be adopted by the Council [of
heads of state and government] unless a qualified majority of Eurozone
states decides otherwise.”

Germany and France also proposed in the letter that a new legal
framework be established in several spheres to “reinforce growth via
competitiveness and the convergence of economic policies.” The spheres
mentioned are financial regulation, the labor market, growth-supporting
policies and EU funds.

They also favor “the convergence and harmonization of the corporate
tax base and the creation of a financial transactions tax.”

The letter includes a proposal to advance by one year to 2012 the
creation of a permanent bailout fund to enhance and replace the existing
European Financial Stability Facility:

“We will accelerate the implementation of the permanent European
Stability Mechanism. It will be effective in 2012 in order to confront
future threats to the stability of the Eurozone, including the risk of
contagion to other member states and allowing it to aid them in the case
of an urgent situation.”

“To increase the efficiency of the ESM and its capacity to take
decisions, rules specifying that decisions can be taken by a super
majority ( 85% of the subscribed capital) must be put into effect.”

The letter also highlighted the commitment of Eurozone governments
to honor their debts, underscoring the “exceptional” character of the
haircut on Greek debt:

“Regarding the implications for the private sector, the ESM treaty
must be revised in order to make it clear that the solution required for
Greece was unique and exceptional.”

“We restate that all other members of the Eurozone reaffirm their
inflexible determination to fully honor their sovereign signatures. The
section of the preamble should clarify that the Eurozone will conform
its practices to the IMF. The common terms referring to collective
action clauses should be introduced in national legislation.”

[TOPICS: M$X$$$,M$G$$$,M$F$$$,MT$$$$,MGX$$$,MFX$$$,M$$CR$]