Charlemagne | Saving the euro

Divergence over convergence

European leaders fall out over Franco-German plans for a pact to encourage economic convergence

By The Economist | Brussels

IT IS only a paragraph long, but the leaders of the European Union fought over it for hours. The words in the conclusions (PDF) of the European summit on February 4th hide the deep cracks that have been re-opened within the EU over how to restore the euro zone after the year-long sovereign-debt crisis:

Building on the new economic governance framework, heads of state or government will take further steps to achieve a new quality of economic policy coordination in the euro area to improve competitiveness, thereby leading to a higher degree of convergence, without undermining the single market. Non-euro members will be invited to participate in the coordination.

This is a long-winded reference to the “competitiveness pact” that France and Germany had wanted to unveil at the summit. The idea is for leaders of the euro zone to agree to co-ordinate and align their economic policies more deeply in sensitive areas like wages, pensions and taxation. The declared aim is to encourage "convergence" to reduce the economic imbalances that contributed to the sovereign-debt crisis. But it could also have a deep political impact, in terms of splitting the euro zone from the rest of the EU.

Angela Merkel and Nicolas Sarkozy beat a partial retreat, however. They did not present a formal paper at the summit, as had been widely expected. But that did not stop an ill-tempered debate over lunch of poached organic salmon and roasted cauliflower. Enough of the contents had been leaked previously – the most detailed summary was an article in Der Spiegel. Most countries found something to object to, whether in substance, in form or both.

Ireland, for example, was livid about the idea of “convergence” in taxation that might force it to raise its low rate of corporation tax. Belgium was apoplectic about the insinuation that it would be made to abolish its index-linked wage system. Several countries outside the euro-zone disliked the notion that the 17 euro-area members would hold separate summits, rather as finance ministers of the euro zone meet regularly the day before ministerial meetings at 27.

More generally, smaller countries, of which there are many, resented the diktat from France and Germany. They were also suspicious of the Franco-German call to co-ordinate such far-reaching measures directly among governments, rather than through the European Commission (the EU's civil service). These doubters include fiscal hawks like the Netherlands, who are less likely to object on the substance.

Many of the same issues are already being addressed through the commission's beefed-up system to monitor economic and budgetary policies. Under legislation being discussed since September, this will eventually include the option of economic sanctions against countries that do not follow Brussels' economic prescriptions.

The day ended with a fudge: Herman Van Rompuy, president of the European Council (representing the 27 leaders) is being asked to confer with the 27 member-states to find out what kind of economic co-ordination could be agreed, in close consultation with the commission. The outcome will be discussed at a one-off summit of the euro-zone in early March, and finalised at a summit of all 27 members at the end of the same month.

So does this mean the Franco-German proposal is dead? Not so fast. One European official says it was “greatly reshaped”. But there seems to be enough left in it for Mr Sarkozy to boast that the notion of “economic government”, of which he had once been a lonely proponent, is now becoming reality.

He also seemed to take for granted a multi-speed Europe: leaders of the 17 countries of the euro-zone would meet when necessary to discuss business strictly related to the euro. This has happened three times in the past but may become more regular. Countries outside the euro would be invited to join in the “competitiveness pact” if they so wished; the leaders of this “17-plus” group would meet to agree matters related to the pact. Finally, leaders of all 27 EU members would meet as usual to discuss all other business, including matters related to the single market.

If all this comes to pass, one can envisage a European Union of three concentric circles: a 17-member euro-zone core, and wider “17-plus” group of countries willing to co-ordinate their economic policies and a looser group of 27, including Britain, which has no desire to be involved in the integration of the euro zone and is becoming ever more distant from it.

What Mr Sarkozy probably wants most of all is the smaller core of 17*, which resembles the older, smaller European Union where France wielded great influence. Mrs Merkel is probably most interested in the 17-plus group, requiring the political commitment from fellow leaders to adopt the economic model of the “most successful countries” (that is, Germany). This is the price she wants for Germany's agreement to create a permanent bail-out fund for the euro zone from 2013, and to expand the current temporary one.

Few euro-zone members will disagree with the need for greater convergence, but agreeing what specific measures to take is another matter altogether. Not even the French and the Germans agree on what should be included in the pact. Asked whether France would reform the wage-indexation of its minimum wage, Mr Sarkozy replied curtly: no.

* My apologies for a confusing typo. The sentence which read "smaller core of 1" should be "smaller core of 17".

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