Eurozone leaders are negotiating a potentially groundbreaking fiscal pact aimed at preventing the currency bloc from fracturing by tethering its members even closer together.
The proposal would make budget discipline legally binding and enforceable by European authorities. Officials regard the moves as a first step towards closer fiscal and economic coordination within the currency area. That would mark a seminal shift in the governance of the 17-nation eurozone. European officials hope a new agreement, which would aim to shrink the excessive public debt that helped spark the crisis, would persuade the European Central Bank to undertake more drastic action to reverse the recent sell-off in eurozone debt markets.
The proposed pact represents the boldest attempt by Europe's leaders to halt the spread of the crisis since they agreed in July to offer Greece a new bailout and to bolster the region's bailout fund. Germany and France are leading the negotiations on the possible new pact among the eurozone's 17 members. One European official said there remains "a lot of arm wrestling" over its precise contents.
The plan could face resistance from some governments worried about a loss of sovereignty. But eurozone officials don't expect struggling southern European countries to resist strongly because most are desperate to stay in the euro and to entice the ECB to give them more help. Moreover, the proposed pact would merely create a mechanism for enforcing fiscal discipline that they have agreed to already. Under the terms of their bailouts, their governments agreed to accept close supervision of their budgets by the International Monetary Fund and the EU.
A majority of eurozone governments hope that the pact would be an unstated quid pro quo for massive intervention in bond markets by the ECB. Many policymakers, investors and economists believe that only decisive ECB action can stop the unravelling of eurozone debt markets and the collapse of Europe's historic experiment with a common currency. It isn't clear how the ECB would respond to such a pact, and any change in course would be highly controversial within the bank. At least some ECB officials are open to such a tacit bargain with governments, according to people familiar with the matter.
France is most eager for a new deal among euro members, while German Chancellor Angela Merkel still hopes a wider consensus for an EU treaty change can be reached, officials close to the talks say. Germany worries that a new fiscal union among euro members could create tension with non-euro countries that feel marginalised, such as the UK.
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