European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.
A day after the European Central Bank armed itself with more capital to resist the crisis, the EU started to discuss measures such as offering shorter-term credits or using the bloc’s main rescue fund to buy bonds of distressed countries.
“My vision is of a Europe that grows ever closer together - - at different speeds in some cases, to be sure,” German Chancellor Angela Merkel told reporters after an EU summit in Brussels today.
For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets about Europe’s search for the right formula to quell the fiscal contagion that threatens the euro.
The future setup “is to some extent window-dressing as it does not solve the current crisis,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”
The euro gained 0.1 percent to $1.3254 at 2:45 p.m. in Brussels, while bonds of Portugal, Spain, Greece and Ireland slipped. Moody’s Investors Service followed up warnings that it may cut the credit ratings of Spain and Greece by announcing today that it downgraded Ireland by five notches to Baa1 from Aa2, with a negative outlook.
Talks Under Way
Luxembourg Prime Minister Jean-Claude Juncker said deliberations are under way over more flexible use of the main 440 billion-euro component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines like the 85 billion-euro package granted to Ireland on Nov. 28.
Asked whether shorter-term credits or bond purchasing are up for debate, Juncker said measures being considered are “exactly those that you mentioned.”
Such steps would ease strains on the ECB, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.
“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”
Driven by a German public outcry against propping up fiscally reckless countries, Merkel opposed putting more money on the table or further entwining Europe’s economies through joint bond sales. Merkel didn’t rule out more flexible use of the current fund, declining to enter into “speculation.”
In a departure from German insistence that each country determine its own fate, Merkel said today that maintaining national fiscal discipline won’t alone put the 16-nation euro region on a sounder footing.
Merkel and French President Nicolas Sarkozy indicated that closer coordination of business tax rates might come back onto the agenda as Europe tries to forge a more unified economy and fix flaws in the euro’s makeup.
In a jab at Ireland’s 12.5 percent corporate tax rate, Sarkozy said “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt.” Spanish Prime Minister Jose Luis Rodriguez Zapatero said the tax discussion is an “important novelty” that will play out over years.
‘Needs to Mature’
Italian Prime Minister Silvio Berlusconi put calls for joint euro-area borrowing in the same category, noting the German opposition “but that the proposal needs to mature. It will be studied more deeply.”
On the summit’s main business, Germany won an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.
German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland’s support package and triggering concern that Portugal and Spain will be next.
While costs for bondholders aren’t mentioned in the two-sentence amendment agreed on last night, the leaders endorsed a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.
ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”
Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.
The compromise text reads: “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.”
Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.
Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, must ratify the amendment.
European finance ministers plan to work out details of the future system by March so it can take effect in the middle of 2013.