European Council President Herman Van Rompuy said Monday that the deepening crisis in Europe will force countries toward closer fiscal union at an upcoming summit that he expects will prove a major step in resolving the region’s problems.
“The situation is more than difficult, even dangerous,” Van Rompuy said in an interview in Washington in advance of a Monday meeting with President Obama.
The crisis that began two years ago over government debt in Greece has now spread to threaten the entire 17-nation currency region, as government borrowing costs rise throughout the area and an economic slowdown makes it even more difficult for nations to meet deficit reduction goals.
“It has become a crisis of the euro zone as a whole,” Van Rompuy said, and is now likely to push the euro member nations toward more dramatic steps.
Those steps include a major transfer of budget sovereignty from national parliaments to European agencies that would have the power to reject national spending plans that are out of line with the euro region’s strict fiscal rules.
The prospect of a treaty change at the upcoming summit pushed markets higher in Europe and on Wall Street, with major U.S. exchanges up about 3 percent in early trading.
Proposals to change the European Union’s basic treaty along those lines will be discussed at an early December summit. Other ideas include the use of commonly issued debt, or euro bonds, that could rely on the strength of AAA-rated countries such as Germany and France to aid neighbors struggling to bring their budgets in line.
Although treaty change in Europe is a complex and lengthy process, Van Rompuy said the summit will nevertheless prove important “if we can send the right signals” to investors and the European Central Bank that governments are ready to move toward more centralized fiscal management.
With a clear path toward tighter fiscal union, he said, confidence would rebuild in markets and the ECB probably would be comfortable continuing or expanding the “non-standard” programs, like buying government bonds, it has used to temper the region’s crisis.
Van Rompuy, a central figure in negotiating Europe’s several, so-far unsuccessful efforts at crisis response, said he felt the severity of the problems had primed countries to act.
“All this was unthinkable a year ago,” he said.