EU Leaders Back Merkel’s Growth Pact as Crisis Endgame Nears

Friday, 11 Mar 2011 03:50 PM

 

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Leaders of the 17 euro nations backed a plan to tighten economic cooperation, clearing German Chancellor Angela Merkel’s condition for completing a comprehensive package to counter to the debt crisis.

The blueprint, intended to boost competitiveness by curbing deficits and reducing labor costs, sets goals rather than binding targets, helping to overcome objections to the version proposed last month.

Euro-area leaders reached an agreement “in principle on the pact for the euro,” European Union President Herman Van Rompuy said in a statement issued as the officials met in Brussels today. The leaders are “still discussing the other elements of the package.”

Following the agreement, European Union policy makers will turn to breaking a deadlock on crisis-fighting steps as they approach a self-imposed deadline of a March 25 summit. Bond yields in Greece and Portugal touched euro-era records this week and debt ratings of Greece and Spain were cut, while the euro recorded its biggest weekly drop since the first week of 2011.

“There is not much time left,” Pier Carlo Padoan, chief economist with the Organization for Economic Cooperation and Development in Paris, said in a telephone interview. “This is a critical time for Europe -- a failure to provide an effective response to the situation would be something that everybody in Europe would pay for and regret.”

Irish Clash

With two weeks to the summit endgame, Merkel and Irish Prime Minister Enda Kenny clashed over company tax rates after the chancellor insisted on a common corporate tax base as the condition for agreeing to ease the terms of Ireland’s 85 billion-euro ($118 billion) bailout.

Kenny dismissed her offer, which she outlined to lawmakers in Berlin yesterday, as an attack on Ireland’s 12.5 percent rate. He told reporters as he arrived for his first summit as leader that it was “harmonization of taxes through the back door.”

Merkel, at the helm of Europe’s largest economy and the biggest country contributor to the Greek and Irish bailouts, also insisted that Greece sell state assets before winning any relief on the cost of Greece’s rescue loans, four lawmakers who attended the closed-doors briefing in Berlin said. Greece has already dismissed selling state-owned land to cut debt.

Greek 10-year yields rose six basis points to 12.81 percent and similar-maturity Irish yields jumped 14 basis points to 9.65 percent. Greek securities plunged this week after Moody’s Investors Service cut the nation’s rating, already at junk, by another three levels, saying the probability of default had increased. Credit-default swaps on Greek government debt rose 8 basis points to a record 1,048 basis points today.

Rescue Fund Capacity

Speaking in Brussels after a morning session with all 27 EU leaders to discuss Libya, Merkel for the first time hinted publicly that she may back bulking up the EU rescue fund for indebted states to its full 440 billion-euro ($611 billion) capacity.

Retooling the fund to its intended size and an easing of Greek and Irish debt terms “is the least that international investors can expect this month,” said Stuart Thomson, chief economist at Ignis Asset Management in Glasgow. “Inevitably this will end in a messy compromise that fails to resolve the peripheral solvency crisis and merely prolongs the agony.”

The yield on Portugal’s five-year debt surged to a euro-era record of 8 percent today on speculation that Prime Minister Jose Socrates would soon be forced to follow Greece and Ireland and seek a bailout. Portugal’s 10-year bond yields reached 7.70 percent on March 9, the highest since at least 1997.

Portuguese Deficit

With the debt crisis lapping at Portugal’s shores, Socrates’s government today announced “significant” new commitments on deficit reduction amounting to 0.8 percent of gross domestic product for this year.

The additional measures should allow Portugal to bring the deficit down to the EU’s 3 percent limit in 2012, and are “an important building block of the needed comprehensive response to the sovereign debt crisis,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.

“I hope the European leaders understand the seriousness of the situation we’re facing,” Portuguese Finance Minister Fernando Teixeira Dos Santos said in Lisbon.

Merkel, hemmed in by coalition resistance to burdening German taxpayers with additional rescue costs before six state elections, praised the “remarkable” Portuguese budget cuts, while saying that debt-wracked countries still have more austerity “homework” to do as part of the deal that EU leaders aim to have in place by month’s end.

Reworked Document

The pact, which includes chapters on competitiveness, labor, sustainable public finances and the stability of financial systems, ran into opposition when it was floated by Merkel and French President Nicolas Sarkozy on Feb. 4.

The document, reworked by a panel chaired by Van Rompuy and Jose Barroso, president of the European Cmmission, leaves countries free to find their own policy mix without imposition from above.

“There were proposals that went too far. What now is on the table is fine,” Dutch Prime Minister Mark Rutte told reporters. “At the same time, it is all very much national and not enforceable, but it will undoubtedly help to strengthen the economies.”

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