Brussels, 25/03/2011 (Agence Europe) - The political void in Portugal seriously disrupts the setting up of the European mechanism to overcome the sovereign debt crisis. On Thursday 24 and Friday 25, all eyes were on how Lisbon intended to handle the fall of the national government at a time when financial markets are showing concern over how the country will cope with its financial commitments. European leaders, refusing to consider international financial aid for Portugal, almost drew a final line under their response to the debt crisis. They agreed to the request from Germany to extend the duration of national contributions to the European Stability Mechanism.
Have you discussed possible financial aid for Portugal? “Absolutely not”, stated European Council President Herman Van Rompuy. “We did not discuss that possibility”, agreed European Commission President José Manuel Durão Barroso. Portuguese Prime Minister José Sócrates explained the national political situation after the parliament threw out the fourth wave of austerity measures his government wanted to introduce (EUROPE 10344). He said clearly that, in the event of a general election, “whatever the future government, all the commitment made on the budgetary objective will be respected”, Barroso said. He went on: “There is broad consensus, not perhaps on the specific measures but on the objectives, not only for this year, but over the coming two years”. Lisbon had pledged to reduce its public deficit to 4.6% of national GDP by 2011, 3% by 2012 and 2% by 2013. The 2010 deficit, which is above 7%, might even be higher than forecast.
After deeming aid of €75 billion to be “appropriate”, Luxembourg Prime Minister Jean-Claude Juncker said on Friday that Portugal should not ask for help. Our confidence in Portugal is “total”, stated French President Nicolas Sarkozy. German Chancellor Angela Merkel, however, said: “The government and the opposition must not only say publicly that they back the objectives but also indicate the measures they intend to use to achieve them.”
“Our economy does not need outside help, it needs confidence”, Sócrates said. He acknowledged, however, that rejection of the measures by the national parliament did nothing to increase confidence, noting that “the package of measures planned by the government had the support of the European institutions”. “No alternative to this programme has been presented” because, had there been, the markets would be more confident over the country's ability to reach its budgetary targets, he argued. Will Portugal be able to meet its April financial commitments? “I reject that type of question which only weakens Portugal's position”, he replied, clearly annoyed. He concluded: “Portugal has sufficient financial means”. Lisbon has to repay more than €9 billion in debts to its creditors by June (€4.2 billion in April and €5 billion in June). Elections might be held in June. The costs of refinancing the Portuguese debt continue to rise.
Comprehensive response. Beyond the Portuguese difficulties, member states were pleased to have almost fully approved their response to the debt crisis (see EUROPE 10343). Van Rompuy set out the various points: - beefing up the rescue funds, the current EFSF and the future European Financial Stability Mechanism, the creation of which required a simplified amendment of the Lisbon Treaty; - adoption by 23 member states of the Euro Plus Pact; - endorsement of the Council package on the legislative package enhancing economic governance (see EUROPE 10337); - definition of economic guidelines with a view to presenting national stability and growth and economic reform programmes by the end of April; - reorganisation of the banking sector, through, for example, the stress tests that are being carried out in the European Union.
“Some fear that this work is seeking to dismantle the welfare state and social protection. Not at all, it is to save them. What we are doing is to make sure that our economies are sufficiently competitive to create jobs and maintain the living standards of all our citizens”, Van Rompuy said, referring to the demonstrations which took place in Brussels on Thursday to protest against the austerity policies. Satisfied that “the economic and monetary union will finally stand on both legs”, Barroso expressed his pleasure that the EU was meeting its commitments to the G20 on “fiscal consolidation, financial instruments, reorganisation of the financial sector and financial governance”. “Everything we have done has advanced European integration, more than I could have hoped when the Lisbon Treaty was adopted”, Merkel acknowledged. She said that “thought processes have changed in all member states: today it is acknowledged everywhere that the crisis was not simply the result of speculation but also of problems that have to be resolved through structural reform”.
ESM and EFSF. European leaders determined the arrangements for the European Stability Mechanism (ESM). With a lending capacity of €500 billion, the ESM will replace the EFSF mid-2013, a facility that has only been deployed to date to come to the rescue of Ireland (see EUROPE 10342).
Germany, the first contributor to the bailout fund (€22 billion for the ESM) managed to have the national share to the capital paid (€80 billion) for the future mechanism to be in five equal amounts paid out over the period 2013-2017. If necessary, eurozone countries will speed up their contributions so that ESM own funds are sufficient to meet its financial commitments.
Herman Van Rompuy said they would ensure that the €500 billion are available while guaranteeing a triple-A status for the mechanism. On a case by case basis, the ESM will provide for the participation of private creditors should the sovereign debt of a country be restructured, requiring assistance from the mechanism. Like the EFSF, it may intervene on the primary markets to buy up bonds directly from an issuer country.
Increasing the effective lending capacity of the EFSF to €400 billion has been determined. The way to achieve this was not, however, decided although the preferred way seems to be a doubling of guarantees.
Finland, whose government is managing everyday running of affairs until the elections, has no mandate for taking decisions. The Ecofin Council will take a final decision on this by June. Into this context come the talks on relaxing the conditions that go with the loans granted to Ireland. The Irish case has been taken off the agenda due to the banking “stress tests” underway in that country, the results of which will be known at the end of next week, Van Rompuy pointed out. He added that they must “evaluate all the consequences” of these tests on the economic adjustment programme being implemented by Ireland, and said that the Ecofin Council will take decisions “as soon as possible”. The Irish austerity programme provides for an allocation of €10 billion for recapitalisation of the banking sector to which must be added a €25 billion provident fund. According to the Irish authorities, over €10 billion will be necessary.
Angela Merkel described the decision to join the Euro Plus Pact taken by six non-eurozone countries (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania) as “very encouraging”. The Euro Plus Pact was finalised at the eurozone summit (see EUROPE 10335). Through this Pact, which remains open to all member states, participant countries undertake to make their economic policies converge in all areas under national competence (employment, pensions, public finance). Intended to increase the competitiveness of the countries of the zone lagging behind, this is a return on the increased effort of solidarity being requested of the virtuous countries. Hungary's Prime Minister Viktor Orbán restated the reasons for which his country would not apply the Euro Plus Pact (see EUROPE 10344).
Germany, Belgium, Spain and France presented measures that they will set out in their national reform programmes to be put to the Commission by the end of April as part of the European semester. In particular, the Belgian government will submit legislation that limits to 0.3% the rise in real salaries in 2011 and 2012. The “index-linked salary system as applied in Belgium allows the unitary cost of labour not to exceed the eurozone average, which is precisely the aim pursued by the Pact”, Belgian Prime Minister Yves Leterme said in a letter to the presidents of the European Council and Commission. In October, Brussels will carry out an assessment of the 2005 reform of pension systems, with, where necessary, a further tightening of criteria for early retirement. (M.B. with A.N./A.By/G.B./H.B./S.P./L.C./transl.rt/jl)