Thursday marked the beginning of a key European Union summit in Brussels. The summit aims to complete an economic deal, which would hopefully settle once and for all how to tackle the euro zone debt crisis and settle the financial markets. No matter the outcome, the conference will be a watershed in the history of the euro zone currency. While the debt crisis has so far been contained to Europe, a comprehensive deal is necessary in order to calm investors and prevent another severe shock to the global economy.
Expectations for the two-day summit are mixed, but many analysts see these final negotiations as taking place in the eleventh hour. It appears that if a wide-ranging deal that determines how best to tackle the debt crisis and ensure that a similar situation does not happen again is not reached, government officials may not be able to ward off uncertainty in the markets, and the collapse of the euro may be imminent. This sentiment was echoed early in the day by French President Nicolas Sarkaozy.
With a possible collapse of the euro in mind, Germany and France have devised a plan of economic reform that requires the amending of the EU’s most basic treaties concerning government debt, and are seeking to rally full EU support behind it. Central to the reforms is a provision that would require euro zone members to adopt balanced budgets on the national level, requiring each member to amend their own national budget rules. Whether or not this is entirely realistic remains to be seen.
In order to enforce this provision, the reform package provides the European Commission with the ability to impose penalties on member nations who do not adopt balanced budgets. Germany and France are also calling for unified corporate and financial transaction taxes as well as loss protection for private investors in the case of future bailouts.
Certainly, these provisions will be the topic of heated debate; however, from the perspectives of Germany and France, they are a no-brainer. Having been forced to bear the brunt of the costs of other member nations’ irresponsible fiscal policies, Germany and France want to ensure that they are never faced with this prospect again. In fact, it is shocking is that such budget provisions were not incorporated in the original euro zone treaties in the first place.
The current debt crisis has made it painfully clear that any member country, even one as relatively small as Greece, has the power to drag the whole system down. The reforms proposed by Germany and France should ensure that a similar situation does not arise again in the future. In doing so, it should also calm investors.
After two years of uncertainty surrounding the debt crisis, that calm would be a welcome cry for markets, which have seen extreme volatility. With a steady economic foundation in place in Europe, businesses all over the world should feel more comfortable investing the reserves they have built up over the past few years, and one of the last hurdles of the 2007 financial crisis will have been overcome.
However, if an agreement is not reached the consequences could be dire. The expectations placed on this summit in Brussels were higher than on any previous summit, and failure could result in the collapse of the euro. This would be disastrous for investor confidence around the world, and the crisis that was formerly contained in Europe would likely come to affect the entire global economy.
Photo Credit: Wikimedia Commons