Brussels, 02/02/2011 (Agence Europe) - The special European Council of Friday 4 February, convened in part to deal with energy issues, will also provide an opportunity over lunch for the EU's leaders to discuss work in progress to restore confidence about the stability of the eurozone. A European source said that the leaders expected the two engines of the eurozone, France and Germany, which have decided on a package of measures, to explain their views, expecting a procedure to be drawn up that will lead to the drafting of a detailed crisis-management plan at the March European Council. An overview of the issues to be discussed (see separate article on Van Rompuy's letter):
EFSF. Consensus seems to be emerging that the EFSF needs greater capacity. Set up in May 2010 and already put in use to drum up cash for Ireland, this temporary intergovernmental fund can raise funds on the money markets based on the guarantees behind it (€440 billion) but if it is to be able to provide greater aid and therefore have greater clout, it will need more guarantees and the details of this have not yet been decided. The six eurozone countries with AAA credit ratings might be asked to increase their contributions.
The awarding of new powers to the EFSF is also under discussions. It could be allowed, for example, to buy up government bonds (sovereign debt), backing up the European Central Bank's purchases of gilts and bonds. It might be allowed to grant loans to highly indebted countries so that they can get a lower interest rate on some of their debt.
Changing the agreement that set up the EFSF might provide an opportunity to arrange a reduction in the nearly 6% interest rate charged on the aid (loans) granted, an interest rate seen as far too high by Ireland, whose credit rating was downgraded by Standard & Poor's on Wednesday from A to A-. It might be decided in this connection to give Ireland more time to pay back its loans.
As part of the process of ensuring stability in the eurozone, the countries with the biggest debt problems (Portugal and Spain) might be forced to call for an EFSF bailout.
Competitiveness Pact. Any extra cash from the richest eurozone countries will come at a price in terms of measures to be adopted. Germany is calling for a Competitiveness Pact, an idea that has the approval of France, which wants true economic governance to be introduced in Europe. In an official visit to Germany, Spanish prime minister José Luis Rodríguez Zapatero said that the very fact that a Competitiveness Pact will be signed and that the big countries - Germany, France, Spain and Italy - will be full members, will boost confidence on the money markets more than any talk about flexibility or the size of the European bailout fund.
The measures called for cover budget issues, social policy and taxation. Budget discipline should include, in Germany's view, debt brakes in national legislation, which the French government is in the process of planning. Greater macroeconomic surveillance of struggling countries might be organised at EU level, but the indicators that might be used have yet to be drawn up. Berlin is reported to be calling for extensive reforms of the labour market (increasing the retirement age and scrapping inflation-linking of pay rises) along with greater harmonisation of corporate taxation.
It is difficult at this stage to see how the measures promoted by Germany would mesh with the EU's economic governance measures currently being negotiated by the European Parliament and the Council of Ministers. “Establishing a system of reinforced economic governance for the EU, and in particular the euro area outside the Union framework raises important, and politically very sensitive, questions. In fact member states should adopt measures which are fully compatible with the Community method and the framework provided by the Treaty”, warned the president of the European Commission, José Manuel Barroso, speaking at the EP on Wednesday 2 February 2011.
Along with the above measures, the EU is in the process of boosting stability of banking and European leaders are calling for tougher bank stress tests and a crisis management system to deal with folded banks.
ESM. The EU27 will discuss preparations for a new European Stability Mechanism, an intergovernmental mechanism to replace the EFSF in the summer of 2013. The ESM will allow private investors, on a case-by-case basis, to take part in a eurozone country's debt restructuring. It will require changes to the Lisbon Treaty. All the EU member states that are not part of the euro have expressed an interest in participating in the planning of ESM, which is chaired by the president of Eurogroup, Jean-Claude Juncker.
Last but not least, behind the scenes there will be much horse-trading to find a successor to Jean-Claude Trichet at the helm of the ECB, a job Germany is very keen to win, and this will be the backdrop to the negotiations over the eurozone crisis management mechanism. (M.B./transl.fl)