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EU Leaders Agree to Create a Permanent Crisis Mechanism

22 December 2010

The last Summit (16-17 December) of EU leaders for 2010 took place under the cloud of mounting market pressure on the indebted eurozone countries. To bring more stability to the eurozone, the leaders agreed on the necessary changes to the Lisbon Treaty to create a permanent bail-out fund from 2013. The following will be added to the Lisbon Treaty: “The member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.” Leaders aimed to keep the changes short and simple, so that these could be adopted by a simplified amendment procedure avoiding the need for referendums.

The amount of the permanent crisis fund will remain the same as the current safety net agreed in May 2010 by the EU and IMF – capped at €750bn. Although there have been doubts whether this would be sufficient should Spain or Portugal also require financial help, Member States were not ready to significantly increase the guaranteed sum. Nor did they agree on the idea to issue EU-wide bonds, a proposal made by Luxembourg which thought this would diminish the vulnerability of individual Member States vis-à-vis the financial markets. This was fiercely opposed by Germany fearing increased borrowing costs as a result of an integrated bond market.

Although the EU Council President Herman Van Rompuy  insisted that “we stand ready to do whatever is required to ensure the financial stability of the eurozone area as a whole” (AFP), the outcome of the Summit was clearly not convincing enough for the financial markets to think that the euro is safe now. Credit agencies one after another before and after the summit announced warnings regarding Belgium, Greece, Ireland, Portugal and Spain, with Irish bonds being downgraded by Moody’s (just as the EU was finalizing the financial assistance to Ireland).

EU leaders acknowledge that creating a permanent bail-out fund is not enough to stabilize the EU’s monetary union in the long run. French President Nicolas Sarkozy and German Chancellor Angela Merkel promised to “better harmonise economic policy” in the eurozone. They plan to “put in place convergence programmes” for currently very diverse fiscal and social policies which add to the differences in competitiveness of eurozone countries. Mrs Merkel emphasized: “It’s not just important to have solid budgets and stable finances, but it is also important that we have a common economic policy”. The French and German leaders understand though that the way towards a greater economic convergence will not be easy. “The thinking has to mature,” admitted Mr Sarkozy (EurActiv). A closer fiscal coordination would require difficult compromises. For instance, Ireland may have to raise its currently low corporate tax, set at 12.5%. This rate, much lower than the rates in other eurozone countries has been subjected to much criticism for some time now.

Another test of the Member States’ political will is fast approaching. This is the first “European Semester” – a six-month cycle of budgetary coordination where the Member States will be asked to submit their annual budget plans to peer-review in Brussels. This would allow the EU to see the inconsistencies and imbalances in advance and to act preventatively (with the possibility of sanctions being applied). The question is whether the new procedures will be sufficient to bring the eurozone finances back into order.

EU leaders will also have to continue the discussions about the long term budgetary restraints for the EU as a whole. In a joint letter initiated by British Prime Minister David Cameron, addressed to the European Commission President José Manuel Barroso, French, German, Dutch and Finnish leaders called for a freeze in the next multiannual financial framework starting from 2014 (in real terms, excluding inflation). This comes after the EU institutions’ demands for 6.2% rise in the next year’s EU budget were cut in half (to 2.9%) by the Member States. Mr Cameron said: “All around Europe countries are tightening their belts to deal with their deficits. Europe cannot be immune from that” (EUobserver). These calls will undoubtedly face opposition from Eastern European countries benefitting from the EU funds, with Polish Prime Minister Donald Tusk already announcing that he would resist cuts. The Commission is expected to make proposals for the new multiannual financial framework by June 2011.

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