French, German Leaders Contemplate New Euro Zone

German and French officials are discussing plans for a radical overhaul of the European Union that would involve establishing a more integrated, but potentially more exclusive, euro zone.

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Senior policymakers in Paris, Berlin, and Brussels have reportedly raised the possibility of one or more countries leaving the euro zone, according to EU sources, while the remaining core pushes for deeper economic integration.

One senior EU official said changing the make-up of the euro zone had been discussed on an “intellectual” level but no decision has yet been made, while a French government source denied any such project was in the works. Such steps would require the backing of EU countries, as their treaties would have to be adjusted.

“This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years,” one EU diplomat told Reuters. “This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it.”

Though there is significant opposition to such a plan in Europe, the Franco-German core has generally been the driving force in steps forward for European integration. Just last week, German Chancellor Angela Merkel and French President Nicolas Sarkozy broached the subject of a country leaving the 17-member currency bloc at a Group of 20 summit in Cannes, with both effectively saying that Greece might have to drop out of the euro zone to give the bloc a better chance at maintaining long-term stability.

However, sources have European officials’ latest discussions going even further, as they are reportedly re-evaluating the 12-year-old currency project, considering which countries and what policies are needed to keep it strong and stable. They may  consider reshaping the currency bloc into what it was originally intended to be: a group of strong, economically integrated countries sharing a currency. Such a group would have no place for a country like Greece.

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“We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity. “France and Germany have had intense consultations on this issue over the last months, at all levels.”

“In doing this exercise, we will be very serious on the criteria that will be used as a benchmark to integrate and share our economic policies,” said the source.

A senior German government official called it a matter of pruning the euro zone in order to make it stronger. “You’ll still call it the euro, but it will be fewer countries,” he said.

Sources say treaty changes will be formally discussed at a summit in Brussels on December 9, adding that an “intergovernmental conference,” the process required to make alterations to EU treaties, could be expected early next year.

Sarkozy has already given the public an idea of what the new euro zone may look like. Addressing students in Strasbourg on Tuesday, he said a two-speed Europe — the euro zone moving ahead more rapidly than all of the EU’s 27 countries — was the only model for the future.

While Sarkozy’s two-speed Europe is already a reality in some respects, officials interviewed by Reuters spoke of a more formal process to create a two-tier structure. “This is something that has been in the air for some time, at least in high-level talks,” said one EU diplomat. “The difference now is that some countries are moving forward very quickly…The risk of a split, of a two-speed Europe, has never been so real.”

Sarkozy sees the euro zone becoming even more integrated, even in sensitive areas such as corporate and personal taxation, while the remainder of the EU would remain as a “confederation,” which could expand to include more countries. However, many countries, including those likely to be included in the pared-down euro zone, are likely to oppose such a plan. Even Britain, which remains adamantly outside the euro zone, opposes any moves that would create a two-speed Europe.

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“To retreat from each other now would be to leave ourselves isolated in extremely tempestuous times,” said Britain’s deputy prime minister, Nick Clegg, during a visit to Brussels on Wednesday. “While the United Kingdom fully supports deeper fiscal integration within the euro zone to support monetary union, we would not wish it to become a club within a club.”