German Chancellor Merkel continues her push for the embedding of strict and enforceable fiscal rules in EU Treaty changes
 
This morning, German chancellor Merkel addressed the Lower House of Parliament (Bundestag) on the euro area sovereign debt crisis. She told Parliament that "the German government does not believe that the European crisis could be solved with a single act...It's a long process, and that process will take years."

She stated that the failure of European governments to abide by the Stability and Growth Pact had led to excessive public debt and a loss of credibility. At the same time, she stressed the independence and credibility of the ECB and the European Court of Justice and urged all to respect and protect these.
 
She made clear that Europe is now on a path to become a fiscal union based on strict and enforceable fiscal rules that should be embedded in the EU Treaty. The EU commission and other EU institutions should play an important role in monitoring and enforcing these rules. Violations and sanctions should be decided and imposed by the European Court of Justice Enforcement, which would thereby lend its independence and credibility to the process. For this to be grounded in law, she called for a revision of the EU Treaty as her first choice, but also pointed to the possibility of bilateral contracts (see, EMU's post-crisis institutional landscape is taking shape, 28 November), if EU Treaty change could not be achieved in the near term. She noted that the latter approach carries the risk that some EU members may be left behind but emphasized that every EU member state would be free to join. She did not elaborate on her vision of the fiscal union other than it should enforce budgetary discipline and provide tools for crisis management, referring to the envisaged European Stability Mechanism (ESM). She strongly rejected the introduction of Eurobonds as a response to the current crisis, but acknowledged that a gradual evolution towards Eurobonds was under way on its own. Yesterday, Finance Minister Schäuble had proposed that each member state transfer debt exceeding the 60 percent of GDP limit into a national redemption fund that would be funded with earmarked national tax revenues and should make debt reduction more credible. His proposal closely resembled elements of the European debt redemption fund proposed by the German council of economic experts, however without the key element of joint liability. The response from the SPD opposition was harsh and noted that the government's gradual approach had led to a dramatic intensification of the sovereign debt crisis. The SPD's Frank-Walter Steinmeier supported EU Treaty change and a prominent role for the European Court of Justice, but did not elaborate more on what the SPD's crisis response would look like.
 
We believe that the German commitment to complement EMU with a fiscal union may eventually include joint liability, which would exceed the narrowly defined limits under the ESM. Moreover, we expect growing recognition by the German government  that the ESM's current design, which foresees public debt restructuring of euro area member states as a regular crisis tool, is inconsistent with the euro's role as one of the world's leading reserve currencies. However, the sequencing of reforms is crucial and more joint liability may only come once binding fiscal rules and national economic reforms are in place ensuring solid public finances, and improved economic growth and employment for all member states.
 

source: BarCap