EU leaders speed up ESM launch, endorse fiscal pact

Deutsche Welle, 30 January 2012  

The summit comes as growth
forecasts are being cut

EU leaders have approved the early debut of their permanent rescue fund, the ESM, and 25 states approved an agreement that cedes budget control over to Brussels. The UK and the Czech Republic have withheld their support.

Twenty-five of the European Union's 27 member states agreed to a fiscal unification pact that would cede much control of national budgets over to Brussels, after an afternoon summit in the de facto EU capital.

The United Kingdom had already declined to take part in the "fiscal compact," which, among other things, would require countries to introduce balanced-budget rules into their laws or constitutions. The Czech Republic also said it would not sign onto the agreement.

The leaders also approved the early introduction of the 500-billion-euro ($656 billion) European Stability Mechanism (ESM). The fund is now set for activation on July 1, one year before its original planned debut. It is to run parallel to its temporary predecessor, the European Financial Stability Facility (EFSF) for one year.

Existing rules limit the combined lending power of the two funds to 500 billion euros, but some officials have suggested the limit should be waived to combine the funds into a 750-billion-euro safety net. 

Merkel (center) backed off a
suggestion that the EU should
control Greece's budget

The leaders also approved a statement that foresees the EU redirecting some funds to fight unemployment and encourage growth.

"Wherever possible, efforts made at the national level will be supported by EU action, including better targeting available EU funds towards jobs and growth, within agreed ceilings," a seven-page summit declaration said.

Transatlantic free trade

Also among the issues touched on in the summit statement was the long-stalled idea of a free trade agreement between the EU and the United States.

"2012 should be a decisive year to move ahead on trade agreements with major partners," the statement said. Experts "should consider all options for boosting EU-US trade and investment."

There are a number of outstanding trade issues between the two economies, some of which have ended up in litigation before the World Trade Organization.

German Chancellor Angela Merkel and British Prime Minister David Cameron both suggested the idea should be revisited during speeches at the World Economic Forum in Davos, Switzerland last week.

India has also been in free trade discussions with the EU since June 2007, and Singapore began similar talks in 2010.

Austerity vs. stimulus

The summit comes at a time when leaders are shifting the rhetoric surrounding the eurozone crisis from austerity to fostering economic growth.

While several governments have tried to bolster investor confidence by passing multiple rounds of budget cuts and tax increases, the austerity has also triggered protests, strikes and government collapses. Unemployment remains stubbornly high, and economic growth forecasts for 2012 have almost universally been cut.

A plan to divert money from EU funding pools like the regional and structural development fund is seen by some as a viable alternative to national stimulus packages, which would have the effect of driving up sovereign debt for individual member states. 

Greece responded with an
 emphatic "no" to the idea of
 losing financial sovereignty

The European Commission said before the summit that up to 82 billion euros could be available for reallocation.

Greece budget czar

The summit got off to a rocky start over a suggestion by German officials that an EU bureaucrat should have substantial control over the budget of Greece. The outcry in Athens led German Chancellor Angela Merkel to back off the idea at the start of the summit.

A debt-restructuring deal for Greece with private creditors is needed before agreement can be reached on a second bailout package. To avoid a default, Athens needs to meet a 14.5-billion-euro repayment deadline in mid-March.

The cost of borrowing for Portugal rose to its highest level in the history of the eurozone on Monday amid fears the country might also seek a future debt-restructuring deal.

Authors: Richard Connor, Andrew Bowen (AFP, AP, Reuters, dpa)

Editor: Michael Lawton

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