- Associated Press - Monday, December 5, 2011

PARIS (AP) — The leaders of France and Germany called forcefully Monday for a new European Union treaty that automatically would punish countries that use the euro if they violate existing limits on overspending.

Stocks and the euro rose while European government bond yields dropped sharply as investors viewed the proposal for a closer fiscal union among the 17 countries as an important step to save the euro.

Implementing treaty changes could take months, but a commitment to tighter coordination could open the way for further emergency aid from the European Central Bank, the International Monetary Fund or some combination.

“Our wish is to go on a forced march toward re-establishing confidence in the eurozone,” French President Nicolas Sarkozy said at a press conference alongside German Chancellor Angela Merkel. “We don’t have time. We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders.”

Investors have been hopeful that the pair will get what they want at a summit in Brussels on Friday, where failure could doom the euro.

There is a risk that implementing the proposals won’t move fast enough for markets or the most heavily indebted countries. Countries such as Italy and Spain need help now to keep their bond yields — the cost of their borrowing — down.

Mr. Sarkozy said he and Mrs. Merkel would prefer that the treaty be agreed to by all 27 members of the European Union, but he left the door open to one that covers just the eurozone and anyone else “who wants to join us.”

Mr. Sarkozy and Mrs. Merkel made several proposals, some of which could be enshrined in a new treaty. They included:

• Automatically punishing any government that allows its deficit to exceed 3 percent of GDP. Governments are supposed to follow this rule already, but many, including France, have flouted it.

• Requiring countries to enshrine in law a promise to balance their budgets.

• Never again asking private investors to take losses, as a bailout of Greece did.

• Making Europe’s bailout fund permanent by the end of next year, rather than mid-2013.

• Holding monthly European summits until the crisis is over.

Worries about the stability of the euro reached a high in recent weeks as Italy’s bond yield, indicative of the rate it would pay to borrow on markets, jumped to record peaks above 7 percent. That level is considered unsustainable and eventually forced Greece, Ireland and Portugal to require financial aid. By comparison, bond yields in Germany, Europe’s largest and most stable economy, are roughly 2 percent.

But Europe can’t afford to rescue Italy, the eurozone’s third-largest economy, so the crisis went into high gear in recent weeks when it looked as if the country might need a lifeline.

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