France and Germany on Monday proposed suspending the voting rights of European Union members who persistently break budget deficit limits, a major reform that would put teeth for the first time in the union's economic pact, but one that faces legal hurdles.
The move was proposed after another Wall Street ratings agency slashed Greece's credit rating to junk levels and signs emerged that Spain could be the next nation to be shut out of global credit markets.
Spanish leaders disclosed that some of the nation's banks, which are thought to hold substantial amounts of Spain's debt, are having difficulty obtaining loans from other banks — in a sign that investors may be starting to boycott the nation as they did with Greece.
That raised the prospect that Spain could become the first nation to tap into a $1 trillion loan guarantee facility set up by the EU to help heavily indebted members.
"Spain and any other country knows that they can make use of this mechanism" if "problems" develop, German Chancellor Angela Merkel told reporters after meeting with French President Nicolas Sarkozy in Berlin. Spanish officials denied that they will seek aid any time soon.
To discourage nations from getting to the point of near-insolvency again, the leaders of the two largest EU nations agreed to propose a far-reaching reform that would deny voting rights to chronic overspenders, like Greece, at an EU summit on Thursday.
Mrs. Merkel in particular has sought the reform, since Germany's taxpayers are expected to have to foot much of the bill for bailing out Greece and other indebted nations.
But Mr. Sarkozy said lawyers will have to determine whether an amendment to the Lisbon Treaty that formed the EU would be necessary — a messy and time-consuming process that could torpedo the measure.
EU leaders also are drafting disciplinary measures short of voting suspension to enforce the treaty's limit on yearly deficits, set at 3 percent of a nation's yearly economic output. EU members agree to the limit when they join the union, but most have flouted it at one time or another.
Analysts say stricter enforcement of the deficit limit and other measures aimed at harmonizing the wide disparities in economic policies among European nations are needed to prevent future debt crises and to preserve the integrity of the union.
"If the eurozone is to survive over the long term, these divergences must be addressed," said Howard Archer, an analyst at IHS Global Insight.
If the eurozone is unable to find ways to both resolve today's debt problems and ensure they do not recur, it "will be liable to hemorrhage members" as countries bail out to gain more control over their economies, he said.
"Stitching together 16 countries with such diverse economic, social and cultural backgrounds turns out to be a lot more difficult than anticipated," said Sung Won Sohn, an economics professor at California State University at Channel Islands. "The euro concept will be tested again and again."
He noted that the union was formed originally more for political reasons than economic ones.
"After the two world wars, the key countries including Germany had decided that the best path to a political union was through economic cooperation. If the current leaders in Germany and France still believe in the concept, they will try hard to keep the eurozone together. If not, the zone could shrink in size."
The debt crisis has taken a major toll on the common currency, the euro, as well as European stock and bond markets this year. A brief respite from the turmoil on Monday got threatened by yet another downgrade of beleaguered Greece, whose enormous debt problems triggered the crisis.
Moody's Investors Service followed Standard & Poor's Corp. in dropping Greece's credit rating to junk levels — which means that mutual funds and other major investors can no longer buy the country's bonds.
Despite the dramatic four-notch downgrade, Moody's Vice President Sarah Carlson said she still expects Greece to avoid a default on its debts if it follows the economic reform plan laid out by the government and uses the backup loans provided by the EU.
But she said Moody's is more concerned than before that Greece's best efforts could be defeated either by a renewed downturn in the economy or by public rejection of critical reforms. Greece's powerful labor unions have persistently protested the wage curbs and budget cuts announced by the government.
Despite the grim outlook for Greece, David Beers, the head of sovereign ratings at S&P, said a Greek default is not "inevitable," as many investors now appear to think.
"If S&P shared that degree of pessimism, our ratings of the eurozone would be uniformly much lower than they are right now," he told a Reuters conference. "Greece has the space and time to show the market and also its own people that it is implementing a plan."
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