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The EU's 'grand bargain' to seal euro defences

24 March 2011, 21:34 CET
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(BRUSSELS) - European Union leaders are due to agree a "comprehensive" response to the yearlong rollercoaster euro debt crisis at a summit Thursday and Friday.

Following are the main points:

THE WARCHEST

After eurozone partners were forced to bail out Greece in May 2010, the EU set up a temporary emergency fund notionally worth 440 billion euros. Tapped already by Ireland, to the tune of some 20 billion, and now possibly needed for Portugal, leaders later specified the fund had an "effective" lending capacity of only about 250 billion. The 17 eurozone countries are trying to raise that capacity to the promised 440 billion but Finland has blocked any deal on boosting the European Financial Stability Facility (EFSF) ahead of April 17 elections.

The EFSF is to be replaced as of January 1, 2013, by a permanent fund, the European Stability Mechanism (ESM). Finance ministers have agreed it should hold 700 billion, a mixture of paid-in capital (80 billion) and guarantees, in order to meet a promised 500-billion effective capacity. But German Chancellor Angela Merkel wants to spread Berlin's big 22-billion cash contribution over five years, rather than three as previously stated. Other countries are also unhappy about their load.

To enable the creation of the ESM, leaders are due to endorse at the summit a basic EU treaty change. One of the main differences with the EFSF is that the new fund will be able to buy government bonds from eurozone states at issue. Previously the European Central Bank could only buy back bonds on a secondary market. This facility, however, will only be available where countries are bound by the straitjacket of a bailout negotiated alongside the International Monetary Fund. The interest charged of bailed-out countries is being lowered. This has already happened for Greece. Partners want Ireland to raise its ultra-competitive corporation tax rate before doing likewise there.

A NEW GROWTH-ENHANCING EURO PACT

The "Euro Plus Pact" asks adherents to work off annual targets against economic benchmarks so that economic policies converge. The idea is that the world's biggest marketplace, home to half a billion people, some 20 million companies and an estimated 12 trillion euros of economic activity, competes better with global rivals. It calls for reforms to retirement and pension systems, given an ageing population. Driving down wages where index-linked rises are written into national law, such as in Belgium, is another ambition.

Rows during negotiations concerned calls for a "Robin Hood-style" tax on financial transactions. Others want a greater focus on growth-enhancing measures, such as Britain and the Netherlands. They want to remove barriers within the EU to the services business and speed up preferential trade deals with the likes of India and Japan. "It's high time to fully unlock the large potential of our greatest asset of all, the internal market," says Dutch Prime Minister Mark Rutte.

SHARED GOVERNANCE RULES

Leaders will back new cross-border laws to punish eurozone states that flout collective budgetary and other targets. Despite some 2,000 amendments tabled by European Parliament lawmakers, the broad thrust of a package of benchmarks accompanied by sanctions will remain. For instance, states must allocate windfall earnings, say from large privatisations, to debt reduction. Accounting, statistical and forecasting practices will also be standardised. A scoreboard of economic indicators such as inflation, unemployment or export strength should detect imbalances earlier, and new fines collected be transferred to emergency bailout funds.

TREATING THE BANKING SECTOR SEPARATELY

New "stress tests" for Europe's banks, after Irish problems went undetected last year, are under way. The latest draft summit conclusions say EU states will prepare "specific and ambitious strategies for the restructuring of vulnerable institutions." Tighter application of rules governing state aid to ensure fair competition is another element going forward.


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