EU Leaders Delay Deal on Incentives for Economic Reforms

European Union leaders pushed back the introduction of a German-inspired system to encourage nations to modernize their economies, as northern and southern countries wrangled over financial incentives.

A June deadline was delayed until October as leaders sparred over whether steps to boost competitiveness would be binding and what sort of rewards countries would get for enacting them.

“We will make progress millimeter by millimeter -- it’s millimeter work, I admit that,” German Chancellor Angela Merkel told reporters late yesterday after the first of a two-day meeting in Brussels.

The plan already represented a scaling back of earlier ambitions for full economic coordination in the euro area. As the debt crisis subsided and Germany blunted calls for the euro area jointly to issue new debt or create its own budget, the EU began work on the plan to strengthen economic discipline.

“Not every country is going in the same direction on this and it’s important to clarify some more elements here,” said Luxembourg Prime Minister Xavier Bettel.

The plan for countries to enter contracts with the EU, binding them to policy changes in areas like the labor market, education and the judiciary, in an attempt to make their economies more competitive, follows months of discussion about how to restore growth in the euro area and prevent another crisis.

Even among the euro area’s northern countries, which formed a united front during the crisis, there was disagreement over the extent to which nations will be forced to implement reforms.

Question Marks

“We put question marks whether contract agreements with member states are the right instrument,” said Dutch Prime Minister Mark Rutte. “The Netherlands don’t want to block this, but an important red line is that they may not be legally binding.”

When the proposal was floated a year ago, Merkel said as much as 20 billion euros ($27 billion) would be made available.

That’s equal to at most 0.2 percent of euro-area gross domestic product, less than the 2 percent that Bruegel, a Brussels research institute, estimated would be needed to cushion disruptions such as a jolt to energy prices. At the summit, leaders made no mention of the amount of money that could be on offer.

Under plans drawn up by EU officials in recent weeks, financial support given as part of reform pledges would come with binding conditions. Whether the aid would come as loans, grants or other sorts of guarantees remains to be worked out.

Last week, lawmakers in the European Parliament warned the idea would increase antipathy toward the EU and could undermine national sovereignty.

“This system of contractual arrangements is the death of Europe if you continue with that,” Guy Verhofstadt, a former Belgian prime minister and now leader of the EU Parliament’s liberal group, told the 766-seat assembly.

To contact the reporter on this story: Ian Wishart in Brussels at iwishart@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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