EU seeks to bridge divisions over competitivity pact

Wednesday, 2 March 2011 00:12 - - {{hitsCtrl.values.hits}}

BRUSSELS (AFP) – European Union president Herman Van Rompuy sought Monday to bridge divisions over deepening economic coordination in the eurozone, scaling down a disputed Franco-German plan opposed by several states.

Van Rompuy was given a mandate by EU leaders at a February 4 summit to draft a competitivity pact that has been pushed by France and Germany in order to prevent any new debt crises from rocking the euro.

Several countries have criticised the plan as a German drive to impose its austere economic model on the rest of the eurozone nations.

A proposal drafted by Van Rompuy’s office and the executive European Commission omits the most controversial ideas pushed by Berlin, a source close to the matter told AFP.

The draft leaves out a bid to scrap wage laws that link salary increases to inflation across the 17 nations and waters down a German call for countries to raise the retirement age, the source said.

The plan was presented at a closed-door meeting of senior officials from the single currency area on Monday.

Tightening economic coordination is part of efforts to reassure markets that Europe is taking steps to put a lid on a debt crisis that forced Greece and Ireland to take bailouts last year and threatens to take down others, including Portugal and Spain.

The proposal comes ahead of a special summit of eurozone leaders on March 11 and a full meeting of EU chiefs on March 24-25 that will also decide the size, shape and scope of a permanent debt rescue fund for the single currency area.

Calling the moment “critical”, Portuguese Prime Minister Jose Socrates said “Europe has already committed too many errors to not understand that the response to this situation should be European.

“There may be countries more affected than others but the problem is systematic,” he said at a conference organised by TSF radio and Reuters.

German Chancellor Angela Merkel has made the competitivity pact a condition for continuing to provide financial aid to struggling countries.

The EU version of the pact calls on states to respect a series of benchmarks in three areas -- competitivity, employment and pensions, and budgetary discipline, the source said.

But rather than impose broad reforms on eurozone states, the proposal says each state would get to select which policy objectives to commit to and achieve within a 12-month period.

Governments would have to monitor their pension systems to ensure they are sustainable, but the document does not include an explicit demand for states to raise the retirement age.

Instead, countries facing “major challenges” would be invited to consider the possibility of “aligning the retirement with life expectancy,” the source said, citing the proposal.

In case where salaries rise too sharply compared to productivity, governments would have to take steps to slow them down.

Governments would also have to adopt a German-style “debt brake” to prevent states from exceeding EU spending limits. Germany has enshrined the rule in its constitution but the pact would not require other states to do the same.

A bid to harmonise the corporate tax system across the eurozone, strongly rejected by Ireland which has benefitted from its low business tax rate, was not included in the EU proposal.

But it does propose widening the corporate tax base, an idea also opposed by Dublin.