Talk of Changes to Eurozone Treaty Puts Default Risk Back on the Table

Stocks sank on Wednesday as word spread that some very big changes may be coming to the Eurozone, including the idea of allowing smaller countries that cannot meet the rules to leave. Reuters is reporting that according to sources, Germany and France have held high level discussions regarding plans to change the makeup of the European Union. Sources say the plans would involve establishing a more closely knit in terms of economic integration and potentially smaller euro zone.

A Reuters report says that discussions among officials in Paris, Berlin and Brussels have involved the possibility of one or more countries leaving the euro zone. The remaining countries would then move toward a greater degree of economic integration, including tax and fiscal policy measures.

One of the primary knocks on the EU “experiment” has been the zone’s lack of fiscal authority and the policing of policies. The plans being discussed for the “core” Eurozone countries would apparently address this issue.

Reuters reports that a senior EU official said Wednesday that changing the make-up of the euro zone had been discussed on an "intellectual" level recently. However, a French government official denied that there was such a project in the works.

Recall that earlier on Wednesday a Handelsblatt report noted that German Chancellor Angela Merkel's CDU party sought to make it possible for EU members to exit euro area without losing membership in the EU.

Earlier Wednesday, Merkal spoke of the need for changes in the EU treaty. In addition, French President Nicolas Sarkozy referred to a "two-speed Europe" in a speech.

According to Reuters, Merkel said, "It is time for a breakthrough to a new Europe." She added, "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."

An earlier article in the Handelsblatt said that a commission within Merkel’s party is putting together a draft to propose that a euro member who either can't meet or desires not to follow the Eurozone’s rules for common currency, would the ability to leave the euro region without losing membership in the EU.

Stocks have sold off on word of the potential changes to the Eurozone as it puts a massive amount of uncertainty back on the table. In addition, traders recognize that the potential for a “messy default” also rises under this scenario.

 

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