Merkozy deal on spending

Tim Wallace
Follow Tim
PROFLIGATE governments will be punished by other euro states under tough new rules unveiled by German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday.

But the Eurozone’s bailout fund will not have the power to negotiate haircuts with private-sector bondholders and overspending states will not be hauled in front of the EU courts, previous German demands that Berlin agreed to drop yesterday.

Instead, there will be sanctions on those spending too much, to be decided by a qualified majority vote by other states.

The political agreement paves the way for European Central Bank (ECB) boss Mario Draghi to allow the Bank’s balance sheet to be used to support failing banks and governments.

Stock markets jumped on the news and investors rushed back into Italian and Spanish bonds on hopes that the plan marks a turning point in the sovereign debt crisis. However, the trend reversed after news of S&P ratings actions leaked out.

The pair – known as “Merkozy” – said that they will renegotiate EU treaties to implement the deal but that if they cannot get agreement from all 27 EU countries, they will seek a separate Eurozone-only treaty for the 17 members, although even that could be difficult to achieve.