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Eurozone Crisis: Merkel Calls For EU Treaty To Be Rewritten

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MERKEL
German Chancellor Angela Merkel has called for the EU treaty to be revised as the eurozone crisis rolls towards yet another deadline | AFP/Getty Images

Germany wants the EU treaty to be renegotiated to forge a closer fiscal union between eurozone countries, and penalties for countries that fail to meet budget rules, Angela Merkel told the Bundestag on Friday morning.

The eurozone's crisis is not one of debt, she said, but one of confidence.

Merkel reiterated her belief that the future of the euro was inseparable with the future of the EU, and said that Germany had benefited from the introduction of the single currency.

"Too much is at stake" for Germany and the German people, she said.

European markets rose strongly in early trade. The FTSE, DAX and CAC-40 were all up around 1.7% by mid-morning, although rumours that US jobs data would be stronger than previously thought was partly responsible for the rally.

On Thursday night, the French President Nicolas Sarkozy called for "the refounding" of the union in order to "guarantee the future of Europe", as the single currency's two largest economies made a public show of unity to try to convince a sceptical market that they will finally be able to end its slow collapse.

Confidence is a major element of the eurozone's problems, as investors demand higher and higher interest rates on bonds issued to sovereign countries. Italy saw its cost of borrowing rocket as the markets lost faith in its ability to reform its economy and pay back its debt - currently standing at 120% of its gross domestic product (GDP).

There are signs that investors are suffering from reassurance fatigue. Sarkozy's claim on Thursday that no savers would "lose a single cent" on loans to the eurozone's economies was a grand statement, but was immediately questioned.

"As admirable as his statement is we're not sure what special powers he has to guarantee such an outcome," Deutsche Bank strategist Jim Reid said on Friday morning.

"It seems as each new prospective bail-out point is reached the political rhetoric gets stronger and stronger. However even with this we are yet to see proof that there will ever be a workable solution."

The "ten days to save the euro" referenced by European finance commissioner Wolfgang Schauble is now a week, as the eurozone crisis rolls towards yet another deadline - this time, the December 9 EU summit.

The lack of a fiscal union and of any mechanisms to enforce fiscal discipline within the eurozone was one of the principal causes of the crisis in the first place. Weaker Southern European economies were able to borrow colossal amounts at rates that assumed they were far stronger than they were.

Before joining the euro, countries such as Italy and Greece could - and did - devalue their currencies relative to the deutschmark to artificially improve their competitiveness by making their exports cheaper. Entering the euro robbed them of that ability. As a result, they ran large fiscal deficits and built up large debts on the promise of future growth that they were incapable of.

The German government - and electorate - find the idea of bailing out the eurozone and allowing it to return to this unsustainable path deeply unpalatable, so a German plan for treaty renegotiation will undoubtedly include a framework for punitive action against countries that do not conform to fiscal discipline.

The Financial Times is reporting that France and Germany differ on whether sanctions for countries that miss fiscal targets would be automatic. This is one of a large number of issues that will need to be thrashed out before the summit on December 9.

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