'New Culture of Stability': Germany Forges Ahead on Reforming the Euro

Berlin means business. In addition to pushing for increased regulation of hedge funds and of the financial markets, Chancellor Angela Merkel's government has drafted a list of proposals to revamp the European common currency. From suspending voting rights to national bankruptcy proceedings, the plan is far-reaching.

German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have big plans for the euro. Zoom
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German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have big plans for the euro.

The offensive now seems to have started in earnest. On Tuesday, European Union finance ministers announced efforts to both rein in hedge funds operating in Europe and to introduce a tax on financial transactions. Overnight, the German financial services regulator BaFin slapped a ban on certain types of short selling.

Chancellor Angela Merkel has also been working with her finance minister and economics minister on far-reaching changes to the treaty underpinning Europe's common currency, the euro.

According to a draft paper respected German business daily Handelsblatt reported it had obtained on Wednesday, Merkel's government would like to see increased monitoring of member states' annual budget proposals, the introduction of stiff sanctions for those in violation of euro-zone debt rules and the suspension of voting rights in the European Council. Furthermore, Germany wants to establish bankruptcy proceedings for insolvent euro-zone countries.

"A crisis like that in Greece cannot be allowed to be repeated in the currency union," the paper concludes, according to the Handelsblatt.

Uncertainty Rather than Regulatory Foresight?

Details from the draft, published on Wednesday, come on the heels of an agreement reached by EU finance ministers to pursue the increased regulation of hedge funds operating in Europe. Resolved despite opposition from Britain, the regulations would require hedge funds to register with regulators and divulge their trading strategies.

The ban enacted on Tuesday night affects naked short-selling and the trading of naked credit default swaps involving euro-zone debt. The bans target two types of speculative trading that have been blamed for exacerbating the financial crisis and Europe's sovereign debt crisis. But markets have not reacted well to the move, with the euro falling below $1.22 in overnight trading. Many analysts have told the media that Germany's move smacked of uncertainty rather than regulatory foresight.

"Time and time again, EU leaders are coming up short in fighting their public relations war against speculators," Brian Varga, a trader with the investment firm Standard Chartered, told the Dow Jones news wire. "Markets would prefer that they focus on solving the real problems, not speculators, but rather economic imbalances."

European leaders have been at pains in recent weeks to convince markets that the euro zone can survive an ongoing sovereign debt crisis which has seen Greece teeter on the brink of bankruptcy. Other countries, including Portugal and Spain, are also considered to be at risk. Merkel on Wednesday went before Germany's lower house of parliament, the Bundestag, to urge lawmakers to pass the €750 billion plan, agreed to by EU leaders early last week, aimed at propping up the euro.

'Incalculable Consequences'

"That is our historic task. If the euro fails, then Europe fails," she said. "The euro is in danger. If we do not avert this danger, then the consequences for Europe are incalculable and then the consequences beyond Europe are incalculable."

The draft document on German proposals for changes in the euro's architecture is an attempt to avoid such disastrous scenarios. While many of the proposals in the draft have been publicly floated in recent weeks, the draft makes it clear that Berlin is serious about taking the lead as the euro zone struggles with a suddenly weak currency. German Finance Minister Wolfgang Schäuble is to present the draft to a European Union working group on Friday before it is considered at an upcoming EU summit.

According to the document, Germany would like to see annual budgets in euro-zone countries undergo a "strict and independent check." Berlin proposes that the job be taken over by the European Central Bank or by a collection of economic research institutes. In addition, the draft proposes stricter penalties for those countries that transgress euro-zone rules. "Euro-zone member states that do not conform to deficit reduction rules should temporarily be disallowed from receiving structural funds," the draft reads. In extreme cases, that funding could be permanently eliminated.

'New Culture of Stability'

Earlier this month, Schäuble had mentioned the possibility of suspending member states' votes should they find themselves in violation of European debt rules, an idea which is mentioned in the draft proposal. Should all else fail, the draft calls for a plan to be established for euro-zone members to declare bankruptcy.

Many of the measures proposed in the draft paper would likely require amendments to the recently passed Lisbon Treaty, a prospect that only recently would have dampened enthusiasm for far-reaching changes given the difficulties associated with approving that treaty. Now, though, the document makes clear, the situation has changed. "If we are interested in a lasting, stable framework for the currency union, we also have to accept the possibility that treaty amendments may become necessary."

Merkel underlined the sentiment during her comments on Wednesday. "Europe," she said, "needs a new culture of stability."

cgh -- with wire reports

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