Germany and France are pushing for a major overhaul of the European Union to counter the debt crisis

Germany and France are pushing for a major overhaul of the European Union to counter the debt crisis, including closer economic ties and tougher enforcement of budget rules.

In his last night speech in Toulon, France, Sarkozy said that France and Germany are advocating a new treaty that will reinvent the EU’s organization. He described the Maastricht Treaty from the early 1990s as “imperfect.”

Sarkozy also said the 17-nation euro area risks “exploding” if members fail to converge economically.

The countries sharing the currency must prepare their budgets in common, narrow competitiveness gaps and face tougher automatic penalties for fiscal rule-breaking, Sarkozy said.

“There can’t be a single currency without economies heading toward more convergence,” Sarkozy said.

German Chancellor Angela Merkel, who will use a speech to lawmakers in Berlin today to outline her stance before a Dec 9 EU summit, has repeated her push to rework EU rules to lock in budget monitoring and seal off the ECB from political pressure.

Germany is seeking changes to the EU’s rulebook to allow closer monitoring of euro countries’ budgets, with sanctions against persistent offenders and potential veto power over national spending plans wielded by the EU Commission.

Merkel will travel to Paris on Dec 5 as the two leaders prepare the proposed overhaul of European institutions. It’s a required step before considering more aggressive measures, she says.

EU President Herman Van Rompuy is due to present proposals for treaty change at the Dec 9 EU summit.

ECB

Merkel’s refusal to deploy the ECB is a rebuff to US President BarackObama">Obama after he exhorted Europe’s leaders to take more action to combat the crisis. Merkel is loath to agree to follow the Federal Reserve and the Bank of England in policies she views as akin to fighting debt with more debt.

Enlisting the ECB in battling the crisis would violate the central bank’s independence and set it on a course of action that might not work, destroying its credibility.

“The market is questioning Merkel’s tough approach,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in a telephone interview with the Bloomberg.

Investors want “clarity on what the framework will look like and what the financial bridge will look like” to fund euro-area governments and banks that need aid while fiscal ties are negotiated, he said.

Van Rompuy has questioned imposing policy through a treaty, saying the process doesn’t move quickly enough to satisfy markets.

“It can take a lot of time,” he said Thursday in Brussels. “We are looking for something that can be handled much quicker” to restore investor confidence.