European Union weighs greater unity to save euro

Denmark’s Prime Min­is­ter Helle Thorning-Schmidt speaks with the media as she arrives for an EU sum­mit in Brus­sels on Thurs­day, Dec. 8, 2011. Dur­ing a two-day sum­mit Ger­man Chan­cel­lor Angela Merkel and French Pres­i­dent Nico­las Sarkozy will try to build sup­port for their plan for euro­zone nations to sub­mit their national bud­gets to much greater scrutiny. (AP Photo/Geert Van­den Wijngaert)

DON MELVIN, GABRIELE STEINHAUSER

Asso­ci­ated Press

BRUSSELS (AP) — Euro­pean lead­ers were wrestling Thurs­day over how much of their sov­er­eignty they are will­ing to give up in a des­per­ate attempt to save the ambi­tious project of con­ti­nen­tal unity that grew from the ashes of World War II.

At stake at the sum­mit in Brus­sels not is not only the future of the euro, but also the sta­bil­ity of the global finan­cial sys­tem and the bal­ance of power in Europe.

To con­vince finan­cial mar­kets that Europe’s economy-crushing debt cri­sis is a one-time event, coun­tries will have to give up sig­nif­i­cant pow­ers, such as some deci­sions on bor­row­ing and spend­ing, to a cen­tral authority.

Pres­i­dent Nico­las Sarkozy and Chan­cel­lor Angela Merkel want to con­vince the other 15 euro­zone lead­ers to agree to a plan that would require their gov­ern­ments to bal­ance their bud­gets and accept auto­matic sanc­tions if they don’t.

At the same time, the cur­rency bloc’s largest economies are being pushed to com­mit more money to boost the eurozone’s fire­walls as the cri­sis threat­ens to pull down Italy and Spain.

The over­all plan must be good enough to con­vince the Euro­pean Cen­tral Bank to inter­vene in the gov­ern­ment bond mar­kets in a man­ner large enough to stop the panic there, said Paul De Grauwe, an eco­nom­ics pro­fes­sor and EU expert at the Catholic Uni­ver­sity of Leu­ven, in Belgium.

The pres­i­dent of the ECB said the bank cur­rently has no plan to increase the scale of its bond inter­ven­tions, which could keep down the bor­row­ing costs of weak coun­tries like Italy and Spain, as mar­kets had been hop­ing. Stocks and the euro fell, while the bor­row­ing rates for Italy and Spain skyrocketed.

ECB chief Mario Draghi had hinted last week that if gov­ern­ments agree to tighter bud­get con­trols, the cen­tral bank might step up sup­port. Ana­lysts said his com­ments on Thurs­day served to keep pres­sure on politi­cians to reach a deal.

Merkel and Sarkozy want to enshrine the tougher bud­get over­sight in a treaty, either by chang­ing the exist­ing EU treaty or cre­at­ing a new one for the 17 euro­zone nations that oth­ers could opt in to.

An EU offi­cial said that in the first hours of the sum­mit, lead­ers agreed that national debt brakes should limit deficits before debt and inter­est pay­ments to 0.5 per­cent of annual eco­nomic out­put. The offi­cial was speak­ing on con­di­tion of anonymity because the talks were ongoing.

The 0.5 per­cent limit, which could only be exceeded in excep­tional sit­u­a­tions or to coun­ter­act a reces­sion, is stricter than the 3 per­cent cap set out in cur­rent EU law, although the 3 per­cent also includes inter­est and debt payments.

“Words alone are not believed any­more because too often we did not live up to our words,” Merkel told a rally of fel­low Euro­pean con­ser­v­a­tives in Mar­seille, France, ahead of the summit.

But huge divi­sions remain.

Some coun­tries resist the idea of giv­ing up some of their con­trol over national bud­gets. Fur­ther­more, the 10 EU coun­tries that don’t use the euro are wor­ried about being left out of impor­tant decision-making if euro­zone coun­tries adopt a new treaty of their own.

Euro­pean Coun­cil Pres­i­dent Her­man Van Rompuy and some smaller coun­tries that have stuck to the bud­get rules in the past, mean­while, are push­ing for much more intru­sive pow­ers for Euro­pean insti­tu­tions to essen­tially take over way­ward states’ fis­cal poli­cies that even France and Ger­many are unlikely to accept.

At the same time, the Ger­mans are still oppos­ing an attempt to strengthen the eurozone’s cri­sis firewall.

An early draft of con­clu­sions for the sum­mit, which was seen by The Asso­ci­ated Press, says that a per­ma­nent euro500 bil­lion ($670 bil­lion) bailout fund, which could come into force as soon as July, should not be dimin­ished by loans already given out by the bloc’s exist­ing res­cue fund.

Those com­mit­ments, which already include the bailouts for Ire­land and Por­tu­gal, could reach around euro200 bil­lion once a sec­ond res­cue for Greece and loans to other coun­tries to recap­i­tal­ize banks have been accounted for.

In addi­tion, Van Rompuy and sev­eral other euro states are push­ing for greater help from the Inter­na­tional Mon­e­tary Fund. Some Euro­pean lead­ers have said that their national cen­tral banks could lend money to the IMF, which could act as a back­stop for finan­cially weak euro­zone countries.

An EU diplo­mat, speak­ing on con­di­tion of anonymity before the sum­mit, said euro­zone lead­ers are likely to agree to give the IMF euro150 bil­lion ($200 bil­lion) in bilat­eral loans to use as a fire­wall in the debt crisis.

But offi­cials from other coun­tries damp­ened expec­ta­tions that that deal could be final­ized by Fri­day. The draft con­clu­sions include a para­graph on increas­ing IMF resources, but left open the amount.

The money would come from the cen­tral banks of the 17 euro nations, not gov­ern­ments, which are already highly indebted.

The diplo­mat added that euro­zone lead­ers hoped non-eurozone coun­tries would con­tribute an extra euro50 bil­lion ($67 billion).

For France and Ger­many, how­ever, the pri­mary goal of the sum­mit is chang­ing the EU treaty in an attempt to make sure that no other debt cri­sis can ever hap­pen again. If nec­es­sary, they say, the 17-country euro­zone could cre­ate its own treaty, which other will­ing nations could join.

Such a more round­about solu­tion may be nec­es­sary because sev­eral non-euro coun­tries — includ­ing the U.K. and Swe­den — have warned that they may block treaty changes.

British Prime Min­is­ter David Cameron has said he will defend his country’s inter­ests at the sum­mit and demand safe­guards if asked to amend the EU treaty. Cameron wants con­ces­sions to pro­tect London’s role as a global finan­cial cen­ter — a demand that is being frowned upon by France and Germany.

Dutch Prime Min­is­ter Mark Rutte said it is vitally impor­tant to include all coun­tries in any new agreement.

“We also have to make sure that we keep the union of the 27 together,” Rutte said as he arrived at the sum­mit. “It is not only a union of the 17 euro­zone nations. It is also of the utmost impor­tance for us that we also keep coun­tries like Britain, Swe­den and the Baltics and Poland united.”

Mar­kets have mostly risen since last week on hopes that an agree­ment among Euro­pean gov­ern­ments on the Franco-German plan would pave the way for the ECB to inter­vene more aggres­sively to sup­port euro­zone bond markets.

How­ever, investor opti­mism was deflated on Wednes­day, when a Ger­man gov­ern­ment offi­cial said it could take up to Christ­mas to clinch a deal, and then again on Thurs­day, when ECB chief Draghi low­ered expec­ta­tions that the cen­tral bank might step in with more help.

An ECB rate cut, and more sup­port for banks to get money flow­ing through the bank­ing sys­tem were not enough to keep investors happy.

Mar­kets were hit again a few hours later, when a Euro­pean reg­u­la­tor said banks have to raise about euro115 bil­lion ($154 bil­lion) to meet a new stan­dard meant to inoc­u­late them lenders against mar­ket tur­moil, includ­ing bad gov­ern­ment debt.

That’s about euro8 bil­lion ($10.73 bil­lion) more than what the Euro­pean Bank­ing Author­ity pre­vi­ously esti­mated, and bank stocks around the con­ti­nent plummeted.

With so much at stake on the summit’s results, U.S. Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner was zip­ping across Europe on a three-day trip to press the region’s lead­ers to solve their differences.

Reforms to deal with the debt cri­sis are “vital” but their imple­men­ta­tion will take some time, Gei­th­ner said in Milan, where he met Italy’s new Pre­mier Mario Monti.

Sec­re­tary of State Hilary Clin­ton, who was in Brus­sels, said the United States was will­ing to offer assis­tance. “But we do need a plan to rally behind, to know the way forward.”

Posted by AP News on Dec 8 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.