The Washington Post

Germany, France push euro zone reforms to tackle crises

MUNICH - Two top European leaders are backing plans that would push the countries that use the euro to adopt similar pension, health-care and other policies in an effort to keep their budgets in balance and the regional economy more stable.

The effort is being spearheaded by German Chancellor Angela Merkel and was endorsed Friday at a Brussels summit of European leaders by French President Nicolas Sarkozy.

The widely differing economic circumstances in the 17-nation euro zone have led stronger nations such as Germany to come to the rescue of two debt-strapped countries, Greece and Ireland. With bailouts potentially needed in Portugal and Spain this year, Merkel has insisted that further German support come with strings attached, in the form of closer coordination of spending and budgets among the countries that use the common currency.

Details are still to be worked out; German officials say they want proposals by March. If the common budget policies can be agreed upon, it could pave the way for critical German support to expand an existing emergency fund, a step called for by investors and outside analysts such as the International Monetary Fund.

Under the plan, euro-zone countries would be required to cede some sovereignty about taxation, budgeting and other policies to the European Union and would probably be pressured to keep their deficits in line with the German model.

Many economists have said the move would help the euro zone to function more cohesively and to ward off financial crises.

"We must adapt our structures so that all are going in the same direction," Merkel said in a statement.

The proposal's sweep is a shift for the leader of Europe's economic powerhouse. Since the beginning of the financial crisis, Merkel has often been cautious about addressing more than the problem at hand - first Greece's debt problems, then Ireland's.

But German government officials cited a growing feeling that broader cooperation among the nations that use the euro is crucial to ensure the stability of the currency and the confidence of the markets.

The proposal raises the prospect that more countries would be expected to increase their retirement age - Germany's is 67 - and that the decisions would come from Brussels, not from their own capitals. Merkel also wants countries to set brakes on constitutional debt, as Germany does, by limiting their ability to spend significantly more than they take in.

"Behind this crisis, there's the fact that there's not enough real integration" in the European Union, said Jean Pisani-Ferry, the director of Bruegel, a Brussels-based economic think tank. Merkel's plan "goes really in the right direction."

But the likelihood of all the E.U. countries signing onto a proposal that would be politically unpopular at home remained unclear.

"At least at first sight, this pact looks like an attempt to make all euro zone countries more German," Carsten Brzeski, a senior economist for ING Bank based in Brussels, said in an analysis note. He said he doubted that some countries would be willing to go along with the changes to their social policies.

Nevertheless, Germany has significant clout. The comprehensive plan would be Germany's price for consenting to boost a $598 billion bailout fund called the European Financial Stability Facility. The fund's true capacity is believed to be around $340 billion, which investors fear would not be enough to sustain both Portugal and Spain were they to need bailouts.

Last month, euro-zone officials called for an increase in the fund's capacity to the originally planned $598 billion and perhaps more.

Merkel has said she does not want to allow the bailout fund to purchase sovereign bonds on the open market. That has proved to be a sticking point, as E.U. and IMF leaders favor the bond purchases.

Olli Rehn, the E.U. commissioner for economic and financial affairs, said in an interview that discussions about economic strategy for the euro zone are a work in progress, "and progress is being made." Rehn didn't express his view on the German-French position but said, "I'm confident of a positive outcome, also with financial backstops as part of it."

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

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