December 17, 2010: European Union government leaders agreed yesterday in Brussels on a plan to establish a permanent financial crisis mechanism for the euro. Beginning in 2012 the new "European Stability Mechanism" (ESM) will replace the existing euro support plan. The agreement includes a change in the EU Lisbon Treaty with two sentences overruling the existing ban on mutual financial assistance. Germany insisted on the amendment because of fears that Germany’s Supreme Court might otherwise prohibit any extension of the current euro bailout fund beyond 2013.

After 2013 euro zone members – currently 16 EU countries – will provide mutual financial support if a eurozone member's stability is attacked by international speculators. However, Germany got its way by insisting that financial aid be provided only when strict conditions are met and the euro zone as a whole is threatened. Under the new plan, a eurozone member will only receive protection against speculative attacks if it unconditionally submits to the austerity requirements imposed by the International Monetary Fund (IMF), the European Central Bank (ECB) and the EU Commission. Greece and Ireland set the precedent for the new stability plan by accepting the strict conditions set by the IMF and Brussels.

A future EU summit will work out the final details of the new "European Stability Mechanism," but it is already clear that France and Germany will play a dominant role in whatever decisions are made. A joint proposal by Luxembourg's Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti on financing part of the combined national debt of all euro zone countries by issuing euro bonds was unceremoniously rejected first by Germany and then by France. The joint proposal by Luxembourg and Italy was intended to provide better protection against speculative attacks on the euro, resulting in lower interest rates for highly indebted countries in the eurozone. However, Germany was not willing to accept slightly higher interest rates on its own national debt in favor of achieving a common position on the issue. Using public media prior to the summit, German chancellor Angela Merkel and Juncker aired their disagreement on the proposal. Germany was the winner.

Chancellor Merkel described yesterday's meeting as "a good day for the euro," saying the summit agreement on the introduction of a new crisis mechanism would "ensure the stability of the euro as a whole." However, the day before the summit, Moody’s rating agency hinted at a lower credit rating of Spain which would have forced the country to pay the highest interest rate on its debt in 13 years. The next day, Moody’s threatened Greece with a further reduction in its credit rating.

The euro's woes are clearly not over. With Germany committed to the euro's future on her terms, eurozone members may have little choice in ensuring the euro's survival other than accepting Berlin's demands for fiscal restraint and responsibility within the eurozone.