Eurozone faces decisive week for agreement

Over the last month, the euro zone debt crisis spilled over from Greece to the larger European economies of Italy and Spain. Now markets are watching closely as the euro faces a decisive week, this week. European Union leaders will seek agreement on a convincing rescue plan that has eluded them for two years.

If all goes according to the plans being hatched in Berlin and Paris, the EU will have taken a step towards fiscal union by Friday night, agreeing on a treaty change to anchor coercive budget discipline for the 17-nation currency area.

On Monday, German Chancellor Angela Merkel will meet French President Nicolas Sarkozy. They will discuss treaty change, economic governance and a emergency rescue plan for the monetary bloc.

Despite high hopes ahead of the meeting, Berlin and Paris still have significant differences about how the euro zone can control national budgets.

Merkel has reaffirmed many times, the euro zone sovereign debt crisis is rooted in several structural defects. To get rid of them and make euro zone a "fiscal union", treaty change is needed. Merkel wants to empower the executive European Commission to veto national budget plans that breach EU limits before they go to parliament. There are automatic sanctions for deficit sinners, and serial offenders may be taken to the European Court of Justice for punishment.

Sarkozy, struggling to win re-election next May, wants euro zone leaders to have the final say, with no new supranational powers for EU institutions.

On Thursday, the European Central Bank will decide whether to cut interest rates to counter a looming recession. It may also consider new measures to provide longer-term funding or Europe's teetering banks. It's expected the ECB will step up bond-buying efforts to ease pressures on troubled nations.

On Friday, a European Union summit will be held in Brussels - an essential meeting to decide the euro zone's future. Joint proposals by Germany and France will be the focus of discussions. But even if they are approved, a winding road lies ahead as treaty change affects 27 EU members.

Analysts say the summit could achieve a "compromise", meaning new rules to strengthen the fiscal discipline in the euro zone. But if differences remain huge and no progress is made, the flight from euro zone bond markets may accelerate. Investor confidence will ebb further, and financial markets could yet see the worst turmoil since the debt crisis unfolded two years ago.

[Source: Xinhua, Beijing, 05Dec11]

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