Merkel and Sarkozy forge EU treaty plan

A new European Union treaty that imposes automatic sanctions on countries that breach public deficit limits is necessary to restore stability in the eurozone and regain market confidence, Angela Merkel and Nicolas Sarkozy said today as they set out their joint plan to stem the euro crisis.

The German Chancellor and the French President said they wanted the treaty to be agreed by all 27 member states but would push for a eurozone-only deal if necessary. "We're going full steam ahead to re-establish confidence in the euro," Sarkozy told a press conference after meeting Merkel in Paris today.

Under the plan agreed by the leaders of the single currency's two biggest economies, countries that break the deficit limit of 3 per cent would face sanctions that could only be blocked by a qualified majority of eurozone governments. They said each country should put a golden rule in its constitution legally preventing it from running high deficits. The European Court of Justice would decide whether national budgets complied with the treaty and golden rule – but it would not have the power to veto them.

Merkel and Sarkozy also asserted that the haircut on Greek debt held by private investors would not be repeated elsewhere, and outright rejected joint eurobonds, which would pool eurozone debt. Sarkozy said: "The message to investors from across the world is that in Europe we pay back our debt."

The pair agreed to bring forward the launch of the European Stability Mechanism – the long-term replacement for the European Financial Stability Facility bail-out fund – to next year from 2013. And they again refused to discuss whether or not the European Central Bank should take more decisive action to tackle the crisis. "We express our confidence in the ECB," Sarkozy said, repeating his earlier insistence that there would be "no comments, positive or negative, on its actions".

The proposals will be set out in a letter to European Council President Herman Van Rompuy on Wednesday. Merkel and Sarkozy said they hoped to have the treaty changes agreed by March.

Reacting to the deal, Sony Kapoor, managing director of the economic think-tank Re-Define, said the leaders had said little new, "but at least they did not have yet another public spat". He added: "The week to save the euro has turned into the months to save the euro and will inevitably morph into the years to save the euro.

"If the leaders stay on message and the ECB shows a flexibility towards supporting troubled sovereigns then it is possible that people will stop expecting things to get worse." However, ruling out eurobonds "seriously limits the options of EU leaders to get ahead of the crisis," he said, pointing out that without pooling of debt there could be no fiscal union.

"Just to be clear, the on-going discussions are about tighter fiscal straitjackets, not about a fiscal union. One cannot have a fiscal union without pooling of debt or revenues and at least some provision for fiscal transfers." Nevertheless he said the ground was being laid "slowly but surely" for the ECB to take a bigger role.

Jennifer McKeown, senior European economist at Capital Economics, said that Merkel and Sarkozy were "focused on creating fiscal rules to prevent future crises instead of upping their financial support to resolve this one." She said: "The onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis.

"After hinting recently that it might act once a 'fiscal compact' was agreed, perhaps if other member states sign up to Merkel and Sarkozy's proposals this week, the bank will step in. But other states' agreement remains a big 'if' and any ECB support will probably need to be bigger than the recently rumoured €200bn to make a real difference."