PARIS: Eurozone leaders have mobilized money and rhetoric to fight a debt crisis, but the fate of the alliance could now depend on a willingness to transform speeches and stopgap measures into a deep policy overhaul. There is a growing conviction in European financial circles that the malaise afflicting the eurozone lies beyond the reach of multi-billion-euro bailouts, of the sort accorded Greece and Ireland and for which Portugal and Spain may yet have to apply. But eurozone authorities have hardly been idle in the face of the turmoil. In fact, in the last year they have taken steps that could radically alter the eurozone's underlying financial architecture. Three potential routes to economic stability have emerged: a permanent rescue fund for troubled euro nations; a common eurozone bond that would allow financially weak members to pool their credit standing with stronger nations; and the creation of a federal, fiscal transfer union. The latter approach would imply a degree of federal tax management and the transfer of funds from the strong to the weak in what would resemble the federal structure of the United States. What is striking to many observers, however, is that initiatives such as emergency bailouts, spurned a year ago, have now become institutionalized. A European Union summit earlier this month decided to create a permanent financial rescue mechanism for ailing euro nations starting in mid-2013. That arrangement would replace a 750-billion-euro ($1 trillion) emergency fund established by the EU and the International Monetary Fund in May. The European Central Bank, known as the guardian of the euro, has meanwhile broken with its preferred practice and since mid-May has been stepping in to buy eurozone government bonds worth 72.5 billion euros. That has helped ensure that debt markets keep functioning, but it has also stoked controversy, with critics insisting that the ECB should not be in the business of financing deficits run up by improvident euro governments. In another groundbreaking step, eurozone leaders have overcome their sovereign sensitivities and agreed to submit their draft budgets to the European Union for review. Greece and Ireland are having their economic policies and finances vetted and approved by the IMF. While many analysts are dismissive of the measures, eurozone officials insist they contain the seeds of far-reaching operational reform that could at last impose the discipline the bloc needs if it is to survive future recessions. German Chancellor Angela Merkel, speaking at the recent EU summit, said that while “it is important to have stable budgets and stable finances” in the eurozone, “it is important to develop, step by step, ... a common economic policy.” French President Nicholas Sarkozy, speaking at the same summit, said “it is now necessary to go further and to make clear in the eurozone the need for the convergence of economic policies.” The priority in the new year would be “the establishment of an economic government” for the zone, he said. Sarkozy's finance minister, Christine Lagarde, last week appeared to fine-tune the president's comments, telling a German newspaper that “an economic government means seeking the approval of other states” before taking action. But her remarks drew an immediate and negative response from German Economy Minister Rainer Bruederle, which suggests that the eurozone's two leading powers remain at odds over precisely what common economic governance entails. Bruedele described the idea as “not a good plan,” calling instead for a “permanent protection mechanism for the single currency” and sanctions against eurozone members who failed to exercise budget restraint. For many analysts however, there is a more serious split in the eurozone. This one divides nations such as Germany, with productive economies powered by substantial savings and trade surpluses, from those considered to be on the “periphery” – Portugal, Spain, Ireland and Greece – that are less disciplined and have run up massive debts and deficits. – Agence France
