Europe to crack whip on debts under Spain pressure

17th June 2010, Comments 0 comments

Europe's leaders will crack the whip Thursday on excessive government borrowing, laying the foundations for cross-border economic government, as Spain comes under pressure.

A deal to get tough on states that breach European Union limits on annual overspends will be extended to tackle long-term debt, which will now be widened to incorporate sometimes vast private and personal repayment needs.

While all 27 EU national governments will be bound by new commitments, the tougher sanctions will apply initially only to the 16 countries that share the euro currency, so as to avoid the need for new treaties.

"Measures can be enforced but they never have been," stressed one European diplomat.

"The question is how much political will is there to use what's already there? So do we need more?"

Germany and France will also have to get round British Prime Minister David Cameron's suspicion of the motives behind an EU bank levy plan, which is designed to offer an insurance policy against future taxpayer bailouts.

But a call to pre-vet member state budgets in Brussels, in a bid to boost Europe's competitiveness, will get London's support on certain conditions.

There will also be hard bargaining over any agreement to open EU entry negotiations with Iceland, given anger in Britain and the Netherlands over the compensation Reykjavik withheld from savers with a collapsed Icelandic bank.

Also on the agenda is Estonia's scheduled switch to the euro come January.

One issue darkening the horizon is the question of Spain's economic health.

On Wednesday, several European leaders sought to play down growing fears that Spain might be looking for EU aid.

Germany Chancellor Angela Merkel, Luxembourg Prime Minister Jean-Claude Juncker were also quick to dismiss the reports -- and to praise the measures Spain's socialist administration had taken to put its finances in order.

"Spain is taking very serious, very courageous measures," said Juncker, who leads finance ministers for the euro countries.

There was, as yet, no indication Madrid needed help, he added.

"We should encourage Spain by underlining that it is taking the right road," German Chancellor Angela Merkel said before meeting conservative backers, amid growing concern among international partners Canada, Japan and the US.

The Spanish cabinet on Wednesday agreed sweeping labour law changes, deemed essential for reviving the economy and fending off a Greek-style debt crisis, despite union calls for a general strike in protest.

After days of rumours, Spanish business daily El Economista reported that the IMF, the EU and the US Treasury had drawn up a liquidity plan for Spain including a credit line of up between 200 and 250 billion euros.

Brussels labelled that report "rubbish".

IMF chief Dominique Strauss-Kahn announced that he would meet Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday, refuelling speculation over a rescue package.

But in comments to AFP he stressed it would be a "working visit", dismissing talk of a bailout.

The nervousness is not confined to Europe.

"We are all concerned... with the need for certain vulnerable European economies to act quickly to fiscally consolidate," Canadian finance minister Jim Flaherty has said, and head off markets that "discern weakness" in the EU.

Spain plunged into severe recession at the end of 2008 after the collapse of a decade-long property boom.

It only returned to low-level growth this year, but the unemployment rate hit 20 percent, the EU's highest bar Latvia.

The Bank of Spain now says that 45 regional savings banks have requested around 11 billion euros from a state restructuring fund, which some observers fear presages a cry for help from the EU's 500-billion-euro rescue fund

© 2010 AFP

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