In response to the recent debt crisis which has weakened relations within the eurozone, France and Germany have proposed a new ‘competitiveness pact.’ This pact would require stricter controls on economic policy amongst members.
The new pact would especially focus on making sure eurozone countries balance their budgets. It could even be considered a constitutional violation for any of the 17 eurozone countries to go above agreed limits on national debt.
Germany’s chancellor, Angela Merkel, said that these measures were vital to protect the strength and unity of the eurozone. The reforms will be a bitter pill to swallow for many member countries, however. Many may be required to raise their retirement ages, a move which has recently sparked protests in France and Greece.
In addition, the practice of tying salaries to inflation would be disallowed. This is currently done in Belgium and Portugal.
Germany, as the eurozone member which has emerged from the global financial crisis with one of the strongest economies, has attempted to take on a leadership role and promote fiscal austerity amongst member countries. Germany has argued that when countries such as Portugal, Italy, Greece and Spain are allowed to run big deficits, confidence in the euro is challenged.
Weakened confidence in the euro hurts the exchange rate, forcing citizens of eurozone countries to pay more for imported goods.
Eurozone governments recently created a bail-out fund to help member states in financial trouble and to shore up confidence in the euro. This would discourage a potentially destabilizing run on the euro. However, fiscal austerity measures would also be necessary to ensure the fund has to be used only rarely.
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