European leaders discuss eurozone crisis at two day summit

Written by Ray Clancy

Thursday, 16 December 2010 09:02

Eurozone policymakers are toying with a number of ideas to fall back on if moves to create a permanent European Stability Mechanism for solving debt crises fail to calm financial markets next year.

Plans will be discussed today (Thursday December 16) by European Union leaders at a two day summit to tweak the EU treaty to create the ESM, which they hope will come into force in 2013.

Most of the options being considered involve boosting the euro area’s firepower to help governments cut off from market financing, notably by making more money available to the European Financial Stability Facility (EFSF) the current rescue fund to be replaced by the ESM.

None of the ideas is subject to formal discussion or set out in any formal proposal, but policymakers are talking about them informally on the sidelines of meetings.

The plans would then be knocked into shape if markets put pressure on Portugal to follow Greece and Ireland by seeking financial help. The euro zone would then want to ring fence the next potential aid candidate, Spain, whose size would stretch available EU funds.

‘Early next year, when we will see many eurozone countries going into the markets to get new funding tension could come up,’ ING economist Carsten Brzeski told Reuters Television.

‘And the tensions can only really calm down if politicians give us a structural solution. They think the European Central Bank can solve the job by purchasing bonds in the markets right now but there will be a moment, and this could come very soon, in which they really have to address the structural problems in the near future and not only after 2013,’ he added.

European Commission President Jose Manuel Barroso said yesterday that if a stronger response to the crisis was needed, it should be by improving and adapting the existing EFSF.

Meanwhile German Chancellor Angela Merkel has moved to silence fears of a eurozone break up, saying that although some members faced tough challenges, Europe’s paymaster would not desert them.

‘No one in Europe will be left alone, no one in Europe will be abandoned. Europe succeeds when it acts together and I would add, Europe succeeds only when it acts together,’ Merkel said in a speech to the German parliament.

Merkel said that some in the 16 nation eurozone faced an uphill task in repairing their public finances but she expressed confidence that the single currency would survive. ‘It is undeniable that some euro zone countries face difficult challenges but it is also undeniable that the euro has shown itself to be crisis proof. We should keep reminding ourselves what would have happened during the turbulence of the financial crisis if we had all had our own currencies,’ she added.

Ireland last month became the second eurozone member after Greece to seek a bailout from the €750 billion temporary mechanism set up by the EU and the International Monetary Fund. There are fears that others, most notably Portugal and Spain but also Italy and Belgium, might also need help as investors worried about their solvency demand ever higher interest rates to lend them money.

Moody’s rating agency threatened on Wednesday to downgrade Spain’s credit rating, hammering markets as it warned of a €170 billion refinancing challenge ahead in 2011. ‘Italy alone needs to borrow €100 billion in the first few months of 2011,’ economist Henrik Enderlein told the Tagesspiegel daily.

As well as setting up a new, permanent crisis mechanism for after 2013 that would include private investors in the costs of any future bailouts, Merkel also wants the EU’s governing treaty to be tweaked so that the crisis mechanism can operate without incurring objections from the country’s constitutional court. Berlin additionally wants Brussels to be able to keep a closer eye on member states’ budgets.

Find out more about the eurozone and euro crisis with Investment International guides:

Currency war report - read here

Eurozone Crisis report - read here