Tuesday 17 January 2017

EU bows to German call for permanent debt mechanism

Published 29/10/2010 | 10:53

Angela Merkel: 'All agreed that there has to be a permanent crisis mechanism.' Photo: Bloomberg News
Angela Merkel: 'All agreed that there has to be a permanent crisis mechanism.' Photo: Bloomberg News

German Chancellor Angela Merkel won European Union backing for a rewrite of EU treaties to create a permanent debt-crisis mechanism by 2013 to prevent a repeat of the Greece-led shock that jolted the euro.

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At a summit in Brussels, Merkel made less headway with calls to bar high-deficit countries from voting on EU decisions, dramatising the limits of Germany’s power over the 27-nation bloc.

“All agreed that there has to be a permanent crisis mechanism,” Merkel told reporters early today after the summit’s first session. “All agreed that a limited treaty change will be necessary.”

Germany’s demands come as bond yields in deficit-strapped Ireland and Portugal inch higher, threatening to reignite concerns about government finances that brought the 16-nation euro to the brink of breaking up six months ago.

EU President Herman Van Rompuy said there was no discussion of a debt-rescheduling facility, leaving the European Commission to propose a structure for the crisis mechanism by December. The summit resumes at 11 m today and wraps up this afternoon.

“The absence of a crisis mechanism almost brought down the euro,” Van Rompuy said.

With the currency up 16pc against the dollar from June’s four-year low, he said “we won the immediate battle of the euro, but the problems are not completely over yet.” The European currency bought $1.3872 at 9:12am Brussels time, down 0.4pc on the day.

Sovereign debt

Irish bonds declined this week, pushing the extra yield that investors demand to hold the nation’s 10-year debt instead of benchmark German bunds to within two basis points of a euro- era record yesterday.

The so-called spread widened 20 basis points in the week to 425 basis points. The Portuguese 10-year spread over bunds widened to as much as 355 basis points yesterday from 339 basis points at the end of last week.

As the biggest contributor to €860bn in loans and pledges to stem this year’s debt crisis, Germany wants to head off speculation against sovereign debt by handing the bill for future bailouts to bondholders.

Merkel’s crisis-resolution plan foresees an extension of debt maturities, suspension of interest payments and a waiver on creditors’ claims, Handelsblatt newspaper reported yesterday, citing an unidentified government official.

Interest rates

“Merkel is using this to bring in other actors, namely the markets, to punish euro zone members for not doing what they should do by demanding higher interest rates for loaning them money,” said Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy. “Whether this will be enough to help the euro remains to be seen.”

To avoid a constitutional fight in Germany, Europe’s largest economy, Merkel wants to enshrine it in the EU’s treaties, which were last amended in 2009 after eight years of bargaining and referendum vetoes in three countries.

Merkel has ruled out extending the taxpayer-funded financial backstop hastily arranged this year that expires in 2013.

Germany wants to use a new fast-track procedure that lets the EU fine-tune the governing treaty as long as the amendments don’t transfer power from national capitals to EU headquarters in Brussels.

The Taoiseach signed up to a treaty change as long as it is done in “as narrow and as simplified a way as possible.”

Little support

By contrast, Merkel found little support for her proposed suspension of voting rights for countries that repeatedly overshoot the euro’s budget-deficit limit of 3pc of gross domestic product.

Opponents include Greek Prime Minister George Papandreou, saved in May from the brink of default by EU and International Monetary Fund loans. “We are opposed to the discussion over the removal of voting rights,” Papandreou said.

Merkel tried a new tactic at the summit, saying that existing provisions to suspend voting rights for governments that trample EU values such as human rights and democracy could be used to punish fiscal recklessness.

The result was a “clear rejection of the German-French idea to impose the sanction over voting rights,” Luxembourg Prime Minister Jean-Claude Juncker said. That didn’t kill the idea. The EU will still examine possible curbs on the euro countries’ voting rights on economic decisions.

Voting rights

Germany’s leverage was undermined by a deal with France last week to soften near automatic sanctions on high-deficit states under a separate set of proposals being pushed through as regular legislation.

That reversal awakened memories of moves by the previous German and French governments to suspend the rules in 2003 when they faced sanctions.

While last week’s sanctions compromise ran into criticism from smaller countries and from European Central Bank President Jean-Claude Trichet, the broad outlines were backed at the summit. No country has been fined in the euro’s almost 12-year history for overstepping the EU’s deficit limit.

EU governments and the European Parliament will shape the new legislation by the end of March. The parliament may try to tighten the rules.

“Mrs Merkel may think that economic governance hinges upon a Franco-German agreement,” Sharon Bowles of the UK, head of the parliament’s economic and monetary committee, said in a statement. “We are not going to put a rubber stamp on any backroom deals.”

Bloomberg

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