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- Pair agree on series of reforms to address eurozone sovereign debt crisis
- Proposals will be presented to EU President on Wednesday
- They include a modified EU treaty, ideally for all 27 EU members, but prepared to cut down to 17 eurozone members if needed
- They want automatic sanctions on countries failing to meet 3% deficit rule
- Eurozone leaders should meet once a month until crisis is sorted
- They agreed Eurobonds is NOT a solution to the problem
- Cameron: New treaty will not trigger referendum
- Shares gain as markets remain optimistic on fiscal union
Last updated at 7:24 PM on 5th December 2011
Angela Merkel and Nicolas Sarkozy agreed the EU needed a new treaty to bring in changes which they insist will prevent a repeat of the current debt crisis.
The French and German leaders unveiled tough new plans - with sanctions to penalise countries that overspend - that they said would ensure the survival of the single currency.
They will present their outline, which will involve bringing all changes into a new single treaty, to European leaders at a summit on Thursday.
Yet while, some British eurosceptics see the drafting of a new document as a chance for Britain to have a referendum, that was today ruled out by a spokesman for Prime Minister David Cameron.
United they stand: German Chancellor Angela Merkel (left) and French President Nicolas Sarkozy (right) presented plans for a new EU treaty today
Following a working lunch in Paris, Merkel and Sarkozy said they were convinced that their two countries could bring discipline to weaker neighbours.
Proposing strict 'automatic sanctions' against those who went into the red, Mr Sarkozy said: 'What Germany and France want is that what has happened will never happen again.
'We want a new Treaty to make all member of the Eurozone aware that what has happened will not happen again.'
He said the automatic sanctions would be imposed for all those failing to meet the 'golden' 3 per cent deficit rule to ensure balanced budgets.
A spokesman for David Cameron, pictured at a cabinet meeting in Ipswich, Suffolk, said Iain Duncan Smith was wrong to say there should be a nationwide vote
Eurozone leaders should also meet once a month for as long as the crisis lasts, to try to focus on supporting growth in Europe, said Mr Sarkozy.
Rejecting Eurobonds as a solution to the crisis, he added: 'All the budgets of the 17 countries would contain a constitutional idea and concept so that the national budget should be aligned towards a balance.
'We also talked about the influence of the private sector. What happened in Greece must not happen again.'
And he said the new proposals would include a modified EU treaty, ideally for all 27 EU members, but that they were also ready to draw up a treaty for the 17 eurozone members, though this would be open to others. Talks on the new treaty should be completed by March.
The pair - who are working so closely together that they have been nicknamed 'Merkozy' - said their principal aim was a credible guarantee that eurozone governments would bring their deficits under control and so satisfy restive markets.
They have agreed on a series of reforms to address the eurozone sovereign debt crisis, and will present them to EU President Herman Van Rompuy on Wednesday.
Prior to today's meeting, they had agreed overall on the need for tougher, enforceable rules that would prevent governments from spending or borrowing too much - and on certain penalties for persistent violators.
But a big bone of contention was how Merkel wanted changes to the European treaties that would give unprecedented power to Brussels to scrutinise national budgets.
Sarkozy, however, wanted to limit treaty changes to just the eurozone members and retain more budget authority in national capitals. Financial markets today signalled optimism that a successful plan to save the euro would be delivered.
The FTSE 100 closed 0.47 per cent up at 5,578; France's CAC 40 ended 1.36 per cent up at 3,208; and Germany's DAX finished 0.54 per cent up at 6,113.
The markets also hope last Wednesday's boost to liquidity by some of the world's leading central banks and this week's slew of meetings - including the last European Central Bank policy decision of the year, today's meeting in Paris and Thursday's eurozone summit - will further reduce such eurozone angst.
Merkozy: French President Nicolas Sarkozy (left) greets German Chancellor Angela Merkel (right) before a working lunch at the Elysee Palace in Paris today
British Prime Minister David Cameron made clear that a new treaty to sort out the eurozone crisis would not necessarily trigger a referendum in the UK.
Answering questions following a speech in London, he said: 'Clearly, there are negotiations going on in Europe. I will be part of those negotiations on Thursday and Friday.
'If there is a treaty at the level of 27, and if that passed powers from Britain to Brussels, there would be a referendum.
'If it didn't pass powers from Britain to Brussels, I would still want to make sure that British interests are pursued.
Cameron must give the public a vote on Europe, says Iain Duncan Smith
'There are very important things we want to safeguard, not least the single market, not least the importance of financial services, and other issues too.
'But there may well be that there isn't a treaty at the level of 27 and that won't be agreed. If that's the case a different set of circumstances will appear.
'While we are not in the euro and while we are not going to join the euro, what is happening on our doorstep makes a difference to us.
'We want these countries to resolve the eurozone crisis. It is having this chilling effect on our economy and the longer this crisis goes on, the worse that effect is.
'We want them to solve their problems, we are helpful and constructive. It's very important that they don't just address treaty mechanisms and they don't just address debt problems, they go to the fundamental heart of it, which is the competitiveness problems that some countries have inside the euro about being able to compete.
'If we don't start to solve those problems, the crisis will come back in different forms.'
Mr Cameron indicated that he does not expect any treaty change significant enough to require a referendum, suggesting that the issue of whether or not to call one will not arise.
He added: 'I have always said that if there is treaty change in Europe then we will make sure that Britain gets something in order to enhance, protect, defend and promote our national interest in Europe. I think that is absolutely the key...
'If there is treaty change at the level of 27, then Britain has its desires and requests to make sure our relationship with Europe is properly managed.'
Downing Street has insisted that any new treaty would not involve a transfer of powers from Westminster to Brussels.
The plans being discussed between Merkel and Sarkozy favour a 'fiscal union' between the 17 countries that have the euro as their currency. This means tax and spending policy could be set from Brussels for all members of the euro.
Wading in: Mayor of London Boris Johnson (right) has now joined the debate, by telling David Cameron (left) he will call for a referendum if the plans threaten the City
For Britain and other non-euro countries, this means being locked out of the inner core of countries, creating a so-called ‘two-speed’ Europe.
While Brussels would not be able to dictate British taxes, the massive change in the way Europe operates and the policies it sets as a bloc could have huge knock-on effects in areas such as trade, immigration and business.
For example, the inner core could loosen immigration controls which could mean bad consequences for Britain as even higher numbers of migrants could then move here after getting a foothold in mainland Europe.
Or conversely, if a financial transactions tax, the so-called Tobin Tax, was imposed on the 17 within the euro, it would be a great boost to the City as financial institutions would be more likely to set up in London.
Mr Duncan Smith argued yesterday that there should be a referendum if there is a 'major treaty change' or 'there are substantial changes that affect Britain's position'.
But the Downing Street spokesman said: 'That is not what is set out in the act,' which drew up the terms on which a referendum is triggered.
Instead No 10 expect the eurozone countries to draw up a new treaty or an amendment to an old treaty which only affects the 17 countries in the single currency.
'What is being talked about is a new set of rules for the eurozone and how those countries that are members of the euro organise themselves on fiscal policy.
'There is no proposal on the table for a transfer of powers from the UK to Brussels. That is not what is being talked about... No-one has put that on the table and I don't think it is likely to be on the table.'
That will anger Eurosceptics, who want Britain to take a stand and demand powers back from Brussels and threaten a referendum if they are not forthcoming.
Today's meeting comes as Italy's new prime minister presents €30billion of austerity measures to parliament in a bid to shore up the country's strained public finances.
The package, dubbed a 'Save Italy' decree, aims to raise more than €10billion from a new property tax, impose a new tax on luxury items including yachts, raise VAT, crack down on tax evasion and increase the pension age.
Italian borrowing costs have spiked, which could spell disaster if Italy is unable to keep up on payments to service its enormous debt of 1.9 trillion euro, which is 120 percent of its GDP.
But unlike Greece, Portugal and Ireland, which were bailed out after their borrowing rates sky rocketed over 7 per cent, the eurozone's third-largest economy is considered to be too big to bail out.
An Italian default would be disastrous for the 17-member eurozone and would likely have damaging consequences throughout the global economy.
Meanwhile in Ireland, the government is today preparing to announce public sector cuts of 3.8 billion euro in a bid to balance the books.
London Mayor Boris Johnson is understood to be preparing to call for a referendum if plans unveiled by Germany and France this week threaten the future of the City.
They are on a collision course with the Prime Minister, who has stated that his priority is to ‘help save’ the euro, rather than repatriate powers to Britain or hold a referendum.
Mr Duncan Smith piled the pressure on Mr Cameron yesterday, saying: ‘The Prime Minister has always said if there is major treaty change - it is now legislated for - that we would have a referendum, and he has never shied away from that.
‘The Prime Minister has always been clear: if there are substantial changes that affect Britain’s position, he would go for a referendum because that’s what we said to the British public we would do.’
In another challenge to the Prime Minister, Mr Johnson and Eurosceptic ministers have been asking Tory think-tanks to advise them on what powers Britain should demand in return for agreeing to the changes.
Several are said to be willing to resign unless Mr Cameron makes a stand.
And today Eurosceptic group Open Europe will publish a report urging Mr Cameron to demand the right to opt out of any of the 49 EU regulations bearing down on the City.
It says financial services raised £53billion of tax and gave Britain a £35billion trade surplus last year. A spokesman for No. 10 said Mr Cameron would only hold a ‘referendum if power moves from London to Brussels’.
The Prime Minister will argue treaty changes will affect only the 17 countries in the eurozone.
But last night a senior minister told the Daily Mail: ‘I don’t think it’s possible to have a significant move towards fiscal union without a significant renegotiation of our relationship with the eurozone.
‘It’s inconceivable that we don’t do something about that. To claim that it will only affect the eurozone is unsustainable.’
Another senior Tory warned Mr Cameron that he risks a bigger rebellion than the 81 MPs who demanded a referendum on pulling out of the EU in October.
‘If David does not set out his stall in a clear and coherent manner then the Tory party will pretty much become impossible to manage,’ the source said.
‘He will face a rebellion which makes the last one look like a tea party – and you’d see resignations.’
The row also sparked tension with the Lib Dems, as Deputy Prime Minister Nick Clegg made it clear that he would not sanction a vote. ‘I don’t think there needs to be a referendum on Europe,’ he said.
‘The referendum will only take place if there was an additional surrender of sovereignty from us to the European Union.’
Q&A: WHAT DOES TODAY'S MEETING MEAN?
What do Germany and France want?
France wants a new treaty of just the 17 eurozone nations enabling Brussels to impose strict tax and spending rules across the zone, to get their terrifying collective debts under control.
Germany wants to go further. Chancellor Merkel wants even stricter ‘fiscal union’ within the eurozone, endorsed by a new treaty signed by all 27 EU countries,
Would this move to fiscal union save the euro?
Only if the other 15 countries in the zone are prepared to accept having their economic policies dictated by Germany, and to a lesser extent France.
They must also keep to their austerity promises, something Greece in particular has so far signally failed to do do. There has already been rioting in Greece over spending cuts.
The fear is that public disorder could spread as people become more impoverished because of cuts ordered from Brussels.
How will this affect Britain?
Still unclear. The Government is committed to a referendum if significant powers are transferred from London to Brussels, but ministers are not keen to have a showdown with the EU in the middle of a financial meltdown.
They might try to argue that the changes involve only the eurozone and should not trigger a referendum. But if new treaties are tabled affecting all EU nations, Eurosceptics will demand a referendum before we sign.
Is this a great opportunity for Britain to claw back powers from Brussels?
It should be. Prime Minister David Cameron says whatever happens he will fight to ‘defend and enhance’ the national interest. However, right now he interprets the greater national interest to be in stabilising the euro, and is reluctant to cause upheaval by demanding a sweeping repatriation of powers.
What might the PM demand?
In exchange for supporting the treaty changes, Britain will insist the EU drops plans to tax the City of London out of existence by imposing a Europe-wide transaction tax. Mr Cameron will seek to regain control over some employment laws, including the Working Time Directive. And he will demand the right to stop future regulations inside the eurozone which would affect the EU-wide single market.
How long will all this take?
Angela Merkel yesterday said it could take years, comparing the process to a marathon. At least four EU nations, including Ireland, would have to have a referendum if there is treaty change. Mr Cameron is arguing that the process will not be quick enough to save the euro. He wants the EU to support the currency with greater financial guarantees now, rather than focusing on institutional change.
What happens next?
France and Germany are holding talks today to stitch together a plan of action. On Thursday EU President Herman Van Rompuy will publish an options paper with proposals on what changes will be needed. The next day, EU leaders will discuss the plans at yet another summit in Brussels.
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