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European Union (EU) leaders met over the weekend to discuss plans on how to restore confidence in the euro and to prevent a future euro-zone crisis. German Chancellor Angela Merkel informally presented a competitiveness pact designed to bolster the competitiveness of the euro-zone economies. The proposals, developed by Germany and supported by France, called for increases in retirement ages, limits to wage increases, and harmonization across the EU for corporate and other taxes rates. Chancellor Merkel indicated that the aim of the proposal was to identify the best practices among euro-zone members and have others adopt them. The plan also called for a “debt brake” that would limit the ability of governments to access funds from the capital markets to continue spending. Ms. Merkel’s proposals highlighted sharp disagreements among the EU members. The heated discussions even involved some of the 10 EU leaders whose countries are not in the euro zone over concerns that the plans could undermine a single European market. The leaders were unable to reach consensus on plans to strengthen the EU bailout fund, but will hold further discussions in March. Lack of substantive progress on a comprehensive plan to restructure the EU could renew euro volatility in the financial markets.

QUESTIONS FOR DISCUSSION:

  1. The level of disagreement and the divergent views at the summit have some doubting whether a substantive plan could be agreed to by the end of March. How long can the EU continue to debate the issues rather than take action before the euro-zone suffers perhaps irreparable harm?
  2. As the euro zone’s largest economy, Germany is likely to bear the brunt of the financial burden for any financial rescue of the euro. Is Germany wise to insist on changes in competitiveness policy by euro-zone members before agreeing to an expansion of the bailout fund, even if it creates volatility in the currency markets?
  3. The official age to receive retirement benefits is 58 in Greece but 65 in Germany. French President Nicolas Sarkozy endured a difficult political battle in order to increase France’s retirement age last summer. Will it be possible to get consensus across the EU members as to the appropriate retirement age?

SOURCE: Fidler, S., & Forelle, C. (2011, February 5). European leaders clash in summit. Wall Street Journal, p. A7. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704709304576123751044549920.html)

Related video clip: Merkel promises euro zone stability pact soon. (Retrievable online at: http://www.euronews.net/2011/02/03/merkel-promises-euro-zone-stability-pact-soon/)

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