• Summit: Keep up the austerity, start “limited” treaty change

    Leaders of the EU’s 27 member states met on Sunday (23 October) with little fresh to show in the face of the biggest crisis in the bloc’s history, but did back a “limited” change to the EU treaty to deliver stronger economic convergence amongst eurozone countries.

     

    At the crisis meeting in the EU capital, the bloc’s premiers and presidents agreed to speed up already-agreed-to austerity and structural adjustment measures and to seek new “growth-enhancing” measures, such as unifying the bloc’s still-fragmented market in digital products and services and cutting regulations on small businesses.

    But on the core issues of what leaders have described as a “comprehensive” package aiming to draw a line under the eurozone debt crisis – including how to leverage the bloc’s rescue fund to a size that can protect Italy and Spain from contagion, and the scale of the write-down to be imposed on holders of Greek bonds – there was no agreement.

    The president of the EU Council, Herman Van Rompuy, told reporters in a pause between the closing of a meeting of the full EU 27 chiefs and a smaller meeting of the eurozone’s 17 leaders, that “good progress” was made, with the bulk of the discussion so far focussed on the issue of a recapitalisation of Europe’s banks.

    It is understood that leaders have converged on a sum of €107 or €108 billion in a scheme for a second round of bank bail-outs. Under the plans, troubled financial institutions must first attempt to raise fresh cash from markets. If unable to do so, national governments will then have to provide back-stops. Only if governments are too weak to be able to perform this task will the eurozone’s rescue fund, the European Financial Stability Facility (EFSF), step into the breach.

    However, no final agreement has been reached on bank recapitalisation, and details will only be released after a meeting of European finance ministers and a second pair of EU and eurozone summits – all of which will take place on Wednesday.

    The leaders did back a “limited treaty change” that will involve tightening fiscal discipline and deepening economic union.

    “‘Limited’ means not a general overhaul of the architecture found in the Lisbon Treaty,” said Van Rompuy. “What is most important is not to change the treaty but to strengthen economic convergence,” he said, adding however that such a change is “not a taboo.”

    The leaders said in a joint communique “that any treaty change must be decided by the 27 member states” and not just the 17 in the eurozone. The leaders will take a decision on treaty change in December based on recommendations from President Van Rompuy and the chair of the eurogroup of states, Luxembourgish Prime Minister Jean-Claude Juncker.

    A new fiscal discipline ‘super-commissioner’ in the euro area is also to be created. The leaders “welcomed” the idea of strengthening the powers of a commissioner with added competence of “closer monitoring and additional enforcement.”

    This chimes with a proposal from the Netherlands in September that a commission could upon the support of a majority of eurozone countries make a heavily indebted state a “ward” of the EU executive, whereby all economic decisions would be taken out of the hands of the country concerned and vested instead in the super-commissioner. Finland, Germany and the commission have backed versions of the plan.

    A completely new post is also to be created, that of “president of the Euro summit”, which will be elected by euro-area premiers and president at the same time that the president of the European Council is appointed. The next such appointment is to take place mid-2012. Until then, the current president, Herman Van Rompuy, will play this role.

    The summit chiefs are also exploring the possibility of a massive new fund alongside the zone’s existing rescue mechanism, hoping to tap trillions from sovereign wealth funds owned by the likes of Norway, Singapore and China that could be used to purchase government debt from in troubled states.

    The existing rescue outfit, the EFSF, would offer insurance up to around 20 percent against losses government bonds purchased by the new fund, or ‘Special Purpose Vehicle’, extending the firepower of the EFSF to as much as €1 trillion.

    Such a plan, involving investment via the International Monetary Fund with ‘Brics’ involvement – referring to the emerging powers of Brazil, Russia, India, China and South Africa – is “on the table”, an EU official said.

    Pressure piled on Italy
    Immediately after the meeting of all 27 member states, the 17 countries in the euro area met to continue discussions.

    Following the eurozone meeting at a late night press conference, no fresh breakthroughs were announced. The two EU presidents told reporters simply that talks were advancing.

    “Work is in progress and progressing well,” said Barroso.

    However, while Italy was not mentioned by name, in a pointed reference to the country, Van Rompuy said: “All member states need to give clear signals of their commitment” regarding public finances by Wednesday, “and this is understood by everybody.”

    German Chancellor Angela Merkel and French President Nicolas Sarkozy held a brief but sharp private meeting with the Italian Prime Minister early on Sunday, demanding that he take tougher austerity measures than he so far has implemented.

    In return for Italy receiving assistance from the European Central Bank late in the summer via vast purchases of government debt in order to temper the country’s borrowing costs, Rome committed to a series of stringent austerity measures. But divisions in his government have slowed down the pace of their implementation.

    Last week, Berlusconi was forced to hold a vote of confidence to prove that he still commanded sufficient support in parliament to push through cuts and structural adjustment.

    Source: EUobserver, OEIC staff