Crunch time for debt-riddled Europe as finance ministers meet

21st May 2010, Comments 0 comments

Crisis-hit European finance ministers locked horns on Friday under pressure from Germany to punish heavily-indebted countries who overshoot national budgets.

The talks began around the same time that Berlin's share of a near trillion-dollar (750-billion-euro) eurozone rescue package, running to about 150 billion euros, secured full German parliamentary approval.

In the guise of the first meeting of a new 'task force' convened by EU president Herman Van Rompuy, the ministers want to craft a tough new regime for ensuring that the 27 national governments take greater shared responsibility for the European Union's combined economy, the world's biggest trading bloc.

After the biggest drop in more than a year on Wall Street triggered fresh turmoil in Asian markets on Friday, the talks are not expected to produce concrete legislative proposals immediately -- with a first report to EU leaders not scheduled to be delivered until June 17.

The task force's final report isn't due till October.

Swedish Finance Minister Anders Borg warned on his arrival that such delays could cause chaos on markets that have consistently punished signs of indecision, dragging the euro to four-year lows against the dollar this week.

"We need to be able to report earlier than in autumn, this cannot go on for months," he said.

"The whole world is watching this... and is losing confidence in Europe," International Monetary Fund head Dominique Strauss-Kahn has said.

London shares sank by more than 2.0 percent, with the FTSE 100 index of leading companies dropping underneath the psychological barrier of 5,000 points to hit lows last seen in early October 2009.

"Panic seems to be taking over," said ETX Capital trader Manoj Ladwa.

The tense backdrop extends equally to political relations, with French President Nicolas Sarkozy having denied a rift with an increasingly eurosceptic paymaster in Germany.

Britain, whose new Prime Minister David Cameron is meeting German Chancellor in Berlin after seeing Sarkozy in Paris, is standing well back -- offering no ideas of its own.

Instead, London is demanding that the eurozone sorts out its problems itself and maintaining a red line over the sovereignty of its own lawmakers over tax and spending decisions.

Merkel essentially wants tougher punishment for nations that run public deficits above permitted levels of three percent of output, which would include withholding EU funds and withdrawing voting rights.

The German proposals also look at conditions for creating a permanent safety net for troubled eurozone economies, that call for countries to be declared bankrupt.

"A procedure for orderly insolvencies will have to be an integral part of any fixed crisis-resolution framework for the euro area," a statement from Berlin said.

On arrival at the Brussels venue, French Finance Minister Christine Lagarde described the German ideas, softened since initial calls for budget miscreants to be kicked out of the eurozone, as "very interesting and going in the right direction."

Nevertheless, that tone still differed sharply from the one used by German Finance Minister Wolfgang Schaeuble on Thursday in defending Berlin's unilateral move to curb speculative trading.

"If you want to drain a swamp, you don't ask the frogs what they think of the situation," he said.

Van Rompuy's panel will steer clear of hot issues surrounding financial regulation, despite a sweeping package of reform being pushed through US lawmakers by President Barack Obama's administration.

"Financial and banking regulation falls outside the scope of this task force," a source said, citing the mandate drawn up by EU leaders at a March 25 summit.

That issue will be dealt with by leaders at the June summit prior to a G20 summit in Toronto laster next month, where Merkel, who stunned markets with the unilateral action on Wednesday, will push for a global tax on financial markets.

Among radical ideas thrown into the European pot, ahead of the October deadline to map out future, cross-border EU 'economic governance,' was a controversial plan for countries to pool their debts.

"Part of a national debt could become a common debt guaranteed by all, if the country's house of budget cards is in good order," said one source, with another spelling out that this was envisaged "as part of a longer-term restructuring" of debts.

The idea remains very much at a formative stage, said Belgium's Didier Reynders, suggesting that the EU could issue bonds at a eurozone level, although Germany has previously shown resistance to that idea.

Also, such a plan could require changes to EU treaties, a prospect that the task force has opted to leave "to the end of the process -- first we want to build consensus."

© 2010 AFP

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