EU debates cracking down on deficits, debts

AP News
Posted: Oct 28, 2010 8:25 AM
EU debates cracking down on deficits, debts

Germany and France faced a struggle Thursday to get skeptical EU partners to endorse new rules on state spending which they say are needed to prevent another government debt crisis in Europe.

German Chancellor Angela Merkel and French President Nicolas Sarkozy headed to a two-day EU summit in Brussels seeking to strip EU voting rights from repeat overspenders and allow for an orderly default of highly indebted countries, measures that would require an arduous effort to change the basic EU treaty.

Those proposals _ coming on top of early warnings and potential fines for violators of the EU's debt and deficit levels _ have raised major objections across the EU.

European Commission President Manuel Barroso called losing voting rights "unacceptable" adding it "never be accepted by" all 27 EU governments.

While the EU leaders may back tougher debt and deficit rules, many governments oppose tinkering with the EU treaty to provide for an orderly default deal and change voting rights for incorrigible overspenders.

That is likely to take years and lead to several national referendums. In recent years, these have killed off reforms and created a crisis of confidence.

Public dismay with the EU led Dutch and French voters to kill the European Constitution in 2005. And Irish voters have also repeatedly dismissed treaty amendments.

"We are very very critical" of changing the EU treaty, said Austrian Finance Minister Josef Proell.

The debt crisis that has gripped Greece and Ireland _ and to a lesser extent Portugal and Spain _ has left the 16-nation eurozone scrambling for stricter enforcement of rules aimed at keeping governments from running big deficits and undermining the shared currency.

Because of the financial crisis of 2008 and the economic slump that followed, countries have gone beyond EU limits on deficits and public debt of 3 percent and 60 percent of GDP respectively. Almost all eurozone nations today have deficits and debts that exceed the maximum ceilings.

Existing provisions to punish overspending governments were never enforced as EU governments lacked the political will to punish fellow members of the club. Limits on deficits are needed because overspending can undermine the euro.

But German Chancellor Angela Merkel says those limits aren't enough to prevent another debt crisis. She is pushing for a permanent mechanism that would force private creditors to shoulder part of the cost when a highly indebted country can no longer pay back its debts.

Swedish Prime Minister Fredrik Reinfeldt said, "We support a permanent crisis management system. We have seen that we need this."

Last week Berlin won backing from France for such an orderly default procedure. In return, Germany gave up its wish for near-automatic fines for overspenders.

Merkel is under pressure from German taxpayers who bridle at seeing their money put on the line to cover the excesses of less disciplined countries. Germany is the biggest contributor to the euro110 billion ($152 billion) emergency loan given to Greece, and to a euro440 billion ($607 billion) stability fund for the wider eurozone that would not be tapped unless needed.

These two backstops expire in 2013, when Greece's debt will likely reach 150 percent of GDP, more than double than is allowed under the eurozone rules.

Germany wants the eurozone stability fund to be made permanent, but only if bond holders such as big banks and hedge funds bear some of the costs of risky lending to a highly indebted country _ either by rescheduling of repayments or accepting a so-called haircut, a reduction of the total sum they are owed.

Without a permanent crisis mechanism, Berlin argues, either rich countries like Germany will have to continue bailing out their weaker neighbors or indebted countries will face surging funding costs like they did this spring.

"Germany cannot and will not give a simple extension" to the current stability facility, Merkel told the German parliament Wednesday.

At the outset of the summit it was unclear what a permanent crisis resolution mechanism would look like, who would run it, and how it would be funded.