Europe cracks whip on debts amid lurking Spanish fears

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Europe cracked its whip on excessive state borrowing on Thursday, laying foundations for cross-border economic government with a fearful eye on gathering dark clouds over Spain.

Leaders were using a European Union summit to widen their focus from public overspends and also target dangerously high private sector debt, a bigger problem with Spain's banks than it ever was with bailed-out Greece.

As Madrid auctions off a major tranche of its sovereign debt, with the interest it has to pay to raise funds rising again, diplomats said that agreement had been reached in advance to toughen sanctions for those who blow their budgets.

Crucially, the creation of new penalties, including the withdrawal of voting rights in EU decision-making, will apply only to those countries that share the euro currency.

That position will delight Britain, whose new Conservative Prime Minister David Cameron arrived for his first summit vowing to defend vigorously a series of "red lines."

Cameron said that "we should be focusing on the issues of substance and not of institutional reform."

He was not alone in resisting anything that might require painful and uncertain treaty negotiations.

"We already have the solutions and the measures needed," said Swedish Prime Minister Fredrik Reinfeldt, pointing out that existing sanctions have never been used.

Earlier this week France and Germany called for the EU's stability pact -- which sets notional limits on public deficits and debts, widely ignored since the worldwide recession -- to be reinforced.

Ballooning debt levels in countries such as Greece, which recently required a multi-billion euro bailout from the EU and the IMF, have pushed leaders to think more of the effect of their decisions, and their public declarations, on their neighbours.

Luxembourg Prime Minister Jean-Claude Juncker, who is also head of the Eurogroup of finance ministers, told the Luxembourg Wort daily that treaty change "is not a possibility in the short or medium term."

As Spain and Germany's governments scurried at home to render stress tests on private banks public in a bid to soothe markets, Spanish officials said that socialist Prime Minister Jose Luis Rodriguez Zapatero would ask his EU peers to remain "prudent" when talking about worries.

A British diplomat said that Cameron's suspicion of the motives behind a joint Franco-German call for an EU bank levy, designed to offer an insurance policy against future taxpayer bailouts and to be presented at a G20 summit in Canada next weekend, meant London would push for reassurances it would only ever function as a patchwork of national levies.

Berlin and Paris also want to see a tax on financial transactions proposed in Toronto, but that idea did not make it past first base in draft conclusions prepared for fellow leaders.

But Britain had cut a deal allowing Brussels to vet the grand lines in member state budgets, in a bid to boost Europe's competitiveness vis-a-vis major global rivals.

Likewise, London and the Netherlands would allow leaders to recommend opening EU entry negotiations with Iceland despite anger in both countries over withheld compensation to savers with a collapsed Icelandic bank.

In another symbolic shift signalled by negotiators, the 27 leaders were to back Estonia's switch to the euro come January.

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

Brussels labelled that report "rubbish," but IMF chief Dominique Strauss-Kahn announced that he would meet Zapatero for a "working visit" on Friday, refuelling speculation over a rescue package.

© 2010 AFP

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