Brussels, 10/03/2011 (Agence Europe) - The time has come for eurozone heads of state and government to demonstrate that they will do everything necessary to guarantee stability of the eurozone. At their meeting in Brussels on Friday 11 March, they are expected to reach agreement on measures concerning areas of national sovereignty that they wish to take to ensure greater harmonisation of their economies and greater competitiveness. Deciding on a “pact for the euro”, as it has finally been called, will be the first stage in a sequence of key events leading at the end of the month to a detailed response to the sovereign debt crisis that has been rocking the eurozone for a year now. With a further downgrading of Spain's bonds on Thursday 10 March, the markets seem to be dominated by scepticism. The markets fear that European banks are under-capitalised and highly indebted European nations are struggling to get their economies to grow at a healthy rate.
In a letter to Europe's leaders, Herman Van Rompuy said that the eurozone leaders would start by examining the pact for the euro and would then examine how to establish closer coordination of economic policies for competitiveness, hoping that agreement in principle would be reached on the latter at the end of the month.
Based on the Franco-German idea of a competitiveness pact, officialised at the February European Council (see EUROPE 10309), the pact for the euro will demonstrate the eurozone's desire to achieve greater economic convergence than set out in the draft legislation to boost economic governance that is currently being negotiated by the Council of Minsters and the European Parliament (see EUROPE 10328). The key issue is that the heads of state and government of the eurozone must up regularly to discuss moves to boost economic convergence, explained a sherpa.
The draft pact drawn up by Van Rompuy and Barroso identifies three key areas of action covered by national sovereignty - competitiveness and pay policy; jobs; and budget rules (see EUROPE 10327). Set against a more European backdrop and respecting the social dialogue traditions at EU and national level, it waters down some of the radical ideas mooted by Germany like the idea of scrapping the inflation-indexing of wage increases. Member states will remain the masters of their own decisions to achieve common targets set each year in line with a timetable decided in advance. While this draft pact does not make anything compulsory, it strongly recommends a number of areas of reform and contains indicators for measuring progress. To ensure that wages do not rise faster than productivity, for example, changes in unit labour costs will be closely monitored. To ensure the sustainability of public finances, it is suggested that the retirement age should reflect changes in life expectancy and laws should be introduced to prevent countries from taking on too much debt. Non-euro countries are invited to join in.
Detailed talks were continuing on Thursday 10 March on the paragraph on taxation. The draft pact calls for a harmonisation of how corporate tax is calculated but does not mention tax rates as such. The European Commission is due to unveil draft legislation in this connection next week. The most recent version of the pact (submitted to the member states on Thursday) spoke of the need to tackle damaging fiscal competition and tax fraud, explained an EU source.
Greater solidarity? The pact for the euro sets out commitments by struggling countries to introduce economic reforms in return for the better performing countries agreeing to provide greater solidarity. Under great pressure from the liberal partners in the coalition government and with all eyes on the elections, Germany's Chancellor Angela Merkel has little room for manoeuvre. Supported by Finland and the Netherlands, which are increasingly reluctant to help out struggling eurozone countries, she is expected to up the stakes before considering making any gesture of solidarity.
Herman Van Rompuy would like the 17 eurozone countries on Friday to decide on “guidelines” to make a success of the talks on Friday 25 March on a detailed response to the eurozone debt crisis. The following issues remain to be decided: - increasing the clout of the eurozone bailout fund, the EFSF, currently estimated at €250 billion; - allowing the EFSF to invest in sovereign debt or lend to countries needing to roll over their debt; - and reducing the interest rates on the loans to Greece and Ireland. In connection with the European stability mechanism that will replace the EFSF in July 2013, all that is known is that it will have a lending capacity of some €500 billion and will include private investors on a case-by-case basis.
In an interview with French newspaper Le Monde on Thursday, the Greek prime minister rejected any restructuring of Greece's public debt on the grounds that this would undermine the credibility of Greece and the heath of the national and European banking systems. He called for a longer repayment period and a reduction in the interest rate on the loans from the EU and the IMF. Would less stringent loan conditions encourage Portugal to call for international financial aid? Portugal admitted on Wednesday that the cost of rolling over its public debt had grown so high as to be unattainable in the long-term. (M.B./transl.fl)