Financial sovereignty on the table at summit
Posted By Admin on December 18, 2011
BRUSSELS, Belgium — 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 the Second World War.
At stake at the summit in Brussels 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 Europes 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 of France and Chancellor Angela Merkel of Germany want to persuade 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 dont.
At the same time, the currency blocs largest economies are being pushed to commit more money to boost the eurozones 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 such as Italy and Spain, as markets had been hoping. Stocks and the euro fell while 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 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 into.
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 per cent of annual economic output.
The 0.5 per cent limit, which could only be exceeded in exceptional situations or to counteract a recession, is stricter than the three per cent cap set out in current EU law, although the three per cent 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 dont use the euro are worried about being left out of important decision-making if eurozone countries adopt a new treaty of their own.
Meanwhile, European Council President Herman Van Rompuy and some smaller countries that have stuck to the budget rules in the past are pushing for much more intrusive powers, which even France and Germany are unlikely to accept, for European institutions to essentially take over wayward states fiscal policies.
At the same time, the Germans are still opposing an attempt to strengthen the eurozones crisis firewall.
An early draft of conclusions for the summit, which was seen by The Associated Press, says a permanent 500-billion-euro ($670 billion) bailout fund, which could come into force as soon as July, should not be diminished by loans already given out by the blocs existing rescue fund.
Those commitments, which already include the bailouts for Ireland and Portugal, could reach around 200 billion euros by the time the new fund takes effect.
In addition, Van Rompuy and several other euro states are pushing for greater help from the International Monetary Fund. Some European leaders have said their national central banks could lend money to the IMF, which could act as a backstop for financially weak eurozone countries.
An EU diplomat said eurozone leaders are likely to agree to give the IMF 150 billion euros ($200 billion) in bilateral loans to use as a firewall in the debt crisis.
– The Associated Press
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