Europe battles to shield the euro for good

16th December 2010, Comments 0 comments

European leaders moved Thursday to shield the euro over the long run despite divisions over the best course of action to bury market fears a debt crisis could engulf Portugal and Spain.

In a clear sign of a determination by authorities to anchor political solidarity in hard cash, the European Central Bank said shortly before the opening of the European Union's seventh and last summit of the year that it will almost double its reserves.

In Brussels from 1600 GMT, EU leaders will lay the foundation for a permanent financial rescue system to protect the eurozone -- a new milestone in the evolution of the 27-nation bloc.

"I come to this summit because I believe that we must send a clear and decisive message for Europe and the euro," German Chancellor Angela Merkel said.

"We all share the same objective: to ensure a stable Europe and currency," she said, calling the future permanent eurozone crisis mechanism a "big piece of solidarity between the states that share the euro."

But EU leaders are divided on calls to boost the coffers of a temporary rescue fund running through to mid-2013 and to create a joint eurozone bond to help governments of weaker economies borrow money at lower interest rates.

Warnings this week by major credit rating agencies that they could downgrade the debt of Spain and Belgium showed that the single currency area -- to expand to 17 nations when Estonia joins on January 1 -- has yet to bring the curtain down on the debt drama that began in Greece.

Europe's financial crisis has forced governments to implement unpopular austerity programmes that have led to massive street protests, including a new general strike in Greece on Wednesday marred by violence.

The summit's outcome is keenly awaited on financial markets that have been in a state of high uncertainty and nervousness for months, driving Ireland to follow Greece into a rescue.

Portugal and Spain are to provide details of their structural reforms at the summit, after leaders agreed at their last gathering in October to tighten fiscal discipline in efforts to prevent countries from running up the huge public deficits and debts at the root of the crisis.

The leaders now want to turn the eurozone's 440-billion-euro European Financial Stability Facility (EFSF), created in May, into a permanent fund. Overall resources total 750 billion euros when IMF and non-euro EU contributions are added.

The ECB, which has bought 72 billion euros of government bonds to contain gaps in yields between Germany and under-pressure eurozone states since May, has urged governments to beef up the EFSF.

Just before the summit, the Frankfurt-based ECB announced its first suscribed capital hike in 12 years, almost doubling it to 10.76 billion euros (14.24 billion dollars) over the next two years.

Some countries such as Belgium want the post-2013 fund at least to be substantially bigger. "We need to prove that we have deep pockets," said Belgian Finance Minister Didier Reynders.

But led by Merkel, the EU has so far resisted pressure to pump extra money in to reassure investors that they can rescue a major economy like Spain's.

A rump of hardline countries say there is no urgency to boost the EFSF as it has barely been touched so far.

Either way, they have to tweak the year-old Lisbon Treaty, the bloc's rule-book, to create the permanent fund -- a condition set by Germany to ensure that its top constitutional court cannot challenge its legality.

After years of problems that dogged ratification of the treaty, EU governments want to make only limited changes to avoid having to go through referendums fraught with risks.

Luxembourg Prime Minister Jean-Claude Juncker, who heads the grouping of eurozone finance ministers, wants partners to consider introducing joint eurozone bonds to help weak countries struggling with high interest rates.

"For a systemic crisis you need a systemic response," Juncker told AFP.

However, hardliners led by Germany remain opposed.

"There is a worry," said Swedish Prime Minister Fredrik Reinfeldt, that "countries with good economic standards, fiscal stability, they might see rising interest rates."

© 2010 AFP

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