Europe polishes response to year-long debt crisis

Monday, 21 March 2011 00:01 -     - {{hitsCtrl.values.hits}}

BRUSSELS, (AFP) - Europe’s leaders put the finishing touches to their response to a year-long debt crisis this week, as financial strain in Portugal threatens a third bailout after Greece and Ireland.

Heads of state and government of the 27 European Union states meet Thursday and Friday in Brussels, with the situation in Libya, and nuclear safety issues in the wake of Japan’s quake and tsunami severely damaging a reactor, high on the agenda.

Their remaining focus will be on meeting a self-imposed deadline for a “comprehensive” response to a roller-coaster euro debt crisis aimed at soothing nervous money markets.

The European Union’s economic in-tray is full.

The summit must strengthen an existing 440-billion-euro temporary rescue fund, while agreeing a change to the EU treaty rule-book to enable the creation of a 500-billion-euro permanent fund from 2013, the European Stability Mechanism (ESM).

To avoid future bailouts, eurozone nations want to deepen coordination of economic policies and create new sanctions to punish countries that exceeded debt limits.

The European Parliament will vote on Thursday on the treaty change, but a staggering 2,000-plus amendments lodged by MEPs to make sanctions against debt offenders more automatic means it may be difficult to meet the June target-date for adoption of the legislation on economic governance.

A eurozone leaders summit on March 11 saw countries most directly concerned agree to increase funding to the temporary mechanism in order to make the full 440 billion euros available to countries in trouble.

Currently almost half is held back as a guarantee to keep borrowing rates down.

They also agreed to allow the fund to buy bonds directly from governments in need of finance, although only within the straitjacket of a bailout.

This left the European Central Bank unhappy. It ECB reluctantly took on the role of supporting struggling eurozone countries by buying billions of euros of their bonds on secondary markets to keep interest rates down, and wanted to hand that role to the ESM

Eurozone leaders also decided to reduce the rate of interest charged Greece on its bailout loans and lengthened the repayment period, in principle making support cheaper for all countries faced with a financial emergency.

But a row with Ireland over its low corporate tax rate meant there were no favours for Dublin -- a question sure to return to the summit agenda.

More generally, leaders also set out guidelines on economic indicators to be used to benchmark eurozone nations to improve and better harmonise their economic competitiveness.

The widely varying levels of competitiveness between countries has also led to strains over adopting appropriate policies for the eurozone.

European trade unions are planning protests on Thursday to decry the biting austerity programmes imposed by governments in the wake of the debt crisis.

Ahead of the March 24-25 summit, finance ministers will use an extraordinary meeting on Monday to try to settle remaining issues.

Time is running out after a period of relative calm, with Portugal struggling after a downgrade by the influential Moody’s credit rating agency and facing a growing likelihood of early elections as the opposition opposes a new austerity programme.

Britain, the Netherlands, Sweden, Denmark, Finland, Estonia, Poland, Lithuania and Latvia, meanwhile want to prioritise a real opening-up of the EU economy, the world’s largest tariff-free area with 500 million consumers and 12 trillion euros of economic activity.

Removing restrictions, accelerating free-trade deals with India, Canada, Japan, Mercosur and the Asian nations, as well as deepening economic integration with non-EU eastern European and southern Mediterranean nations is their prescription.