In Europe, wary leaders mull Merkel-Sarkozy proposal

Wary European politicians on Tuesday mulled a Franco-German proposal that euro-zone countries permanently rein in their deficits, underlining the difficulties of what would likely be an arduous process to rewrite European treaties, then abide by them.

German Chancellor Angela Merkel and French President Nicolas Sarkozy proposed Monday that euro-zone countries wash away doubts about the economic health of the continent by putting strict limits on their borrowing and spending.

The new rules would require more changes for populations already feeling the bite of austerity budgets, and will be discussed in greater depth at a European Union summit Thursday and Friday.

Emphasizing the stakes, Standard & Poor’s announced Monday evening that it was putting 15 euro-zone countries on watch for a possible downgrade of their credit ratings over concerns about the direction of the crisis. Indignant European leaders said Tuesday that the ratings agency’s move was premature.

The warning “is grossly excessive and unjust,” Luxembourg Prime Minister Jean-Claude Juncker, leader of the Eurogroup, said in an interview Tuesday on Deutschlandfunk Radio. “One should give the ratings agencies no more faith than they deserve.”

Asian markets closed down on the Standard & Poor’s warning, with Japan’s Nikkei down 1.39 percent, and Hong Kong’s Hang Seng index down 1.24 percent. European markets were mixed in early afternoon trading. Germany’s DAX was down 0.55 percent, France’s CAC 40 was down 0.23 percent and Britain’s FTSE 100 was up 0.23 percent.

Any new euro zone treaty would require approval by at least the 17 countries that share the euro currency. Some countries are likely to pose formidable challenges, both in ratifying the treaty, and then — perhaps more difficult — following the new rules. Merkel and Sarkozy’s proposal includes strict controls on borrowing that were already in place under a previous agreement but were disregarded by many of Europe’s biggest economies, including Germany itself, a country that prides itself in its fiscal rectitude.

In France, which is in the middle of an election campaign, opposition to Sarkozy’s deal has prompted calls that invoke the specter of Teutonic might. Last week, Socialist lawmaker Arnaud Montebourg told France Info Radio that the treaty rules were a “German diktat imposed on the euro zone,” comparing Merkel to Otto von Bismarck, who built Germany into a militaristic power in the 19th century.

U.S. Treasury Secretary Timothy F. Geithner backed the German-French proposal. Geithner, speaking in Berlin after talks with German Finance Minister Wolfgang Schaeuble, praised the deal, Bloomberg news reported.

“This of course will take time” and “a very substantial commitment and a sustained commitment of political will,” Geithner told reporters, as quoted by Bloomberg. “Financial crises are ultimately resolved when governments and central banks succeed in creating conditions that make it compelling for investors to take the risk involved in lending to governments and to banks.”

But British Prime Minister David Cameron expressed concern about the proposal and what it might mean for British interests. The European nation does not use the euro.

“Eurozone countries do need to come together, do need to do more things together — if they choose to use the European treaty to do that, Britain will be insisting on some safeguards too,” Camerson said Tuesday, according to the Associated Press. “As long as we get those, then that treaty can go ahead. If we can’t get those, it won’t.”

And as other countries grappled with their budgets this week, immediate pain trumped the full potential consequences of the treaty changes as a focus. But the difficulties of winning approval for cuts pointed toward the distinct unpopularity of enshrining strict controls over future spending.

In Ireland, where any treaty changes may have to be put to a popular vote, Prime Minister Enda Kenny was unveiling further sweeping cuts to government services and spending on Monday and Tuesday, after a year of already-tough austerity. The Irish Independent, the country’s top-circulating newspaper, devoted a 20-page special section on Tuesday to the cuts, and put a cartoon of Kenny perched on top of a glowering European Union iceberg on its front page.

Vulnerable Irish citizens “all are expected to pay for the greed of golden circles,” the bondholders who lent money to Irish banks, said Sinn Fein opposition leader Gerry Adams, in a nationally televised address Monday night, calling for investors to take a loss. Merkel and Sarkozy proposed on Monday doing the opposite, instead underscoring the sanctity of government bond obligations.

The Greek parliament was expected on Tuesday to give final approval to a tough 2012 budget after months of back-and-forth political fighting, as a European inspection team arrived to monitor the country’s finances. Images of Merkel dressed up in a Hitler costume have become common on Athens streets, as angry references to World War II and German domination are shouted at protests.

And in Italy, politicians and citizens were still absorbing the full impact of a proposed $40 billion in cuts unveiled Sunday by new Prime Minister Mario Monti.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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