Euro zone narrows differences on anti-crisis package
Germany said on Wednesday it had reached broad agreement with France on steps to boost economic coordination in the euro zone as part of an anti-crisis package also likely to see the scope of Europe's bailout fund bolstered.
February 03, 2011 / 08:47 IST
Germany said on Wednesday it had reached broad agreement with France on steps to boost economic coordination in the euro zone as part of an anti-crisis package also likely to see the scope of Europe's bailout fund bolstered.
A senior German official told reporters he expected Chancellor Angela Merkel and French President Nicolas Sarkozy to present joint proposals to strengthen policy coordination in the 17-nation bloc at an EU summit on Friday.French officials in Brussels said they were unaware of such a plan.German Deputy Finance Minister Joerg Asmussen sent the strongest signal yet that Berlin was prepared to give new powers to the euro zone's rescue fund in exchange for fiscal discipline commitments by other euro members."We have always said that we would do all that is necessary to defend the stability of the euro zone as a whole," Asmussen told a conference in Frankfurt."That might include revising the scope and efficiency of the EFSF," he said, referring to the 440 billion euro (USD 609 billion) European Financial Stability Facility. No final agreement on a new strategy for combating the euro zone's sovereign debt crisis is expected before a March 24-25 summit, but markets are already welcoming signs that European leaders are zeroing in on a deal to stem contagion from Greece and Ireland to vulnerable countries like Portugal and Spain.The euro has gained 7% on the dollar in the past three weeks to trade above USD 1.38 for the first time since early November. The risk premiums on Spanish and Greek 10-year bonds are at a three-month low. Even the spreads between Irish bonds and German benchmarks narrowed on Wednesday on relief that a ratings downgrade from Standard & Poor's was not deeper. Euro zone debt crisis in graphics, click on http://r.reuters.com/hyb65pFranco-German motorLong seen as the motor behind European integration, Germany and France struggled last year to forge consensus on how to tackle the worst crisis in the single currency's 12-year existence, stoking fears the bloc could break apart.German officials indicated Merkel and Sarkozy had overcome differences in recent weeks to forge a rough blueprint for a deal that balances French demands for closer economic coordination and Germany's push for more fiscal discipline."Of course we are talking with France about this (economic coordination) and are largely in agreement," the senior German official said, requesting anonymity."Therefore I expect that the chancellor and the French president will present these ideas together at lunch (at Friday's summit)."French diplomats in Brussels said they were not aware of plans for a joint communication with Germany on Friday.Spanish Prime Minister Joese Luis Rodriguez Zapatero said in an interview in German daily Handelsblatt that Germany needed to make more concessions on its plan to harmonise tax, labour laws and retirement ages.In a draft seen by Reuters last week, Berlin wants euro zone countries to enshrine German-style deficit and debt limits in their national legislation, tie their pensions policies to demographic factors and move towards a harmonisation of corporate tax and labour policies.French government spokesman Francois Baroin said Paris and Berlin were in constant contact on the negotiations but did not mention any joint proposal.In an apparent nod to Berlin, France announced on Wednesday that it would reform its constitution to include a "golden rule" on balancing the budget."This is a reshaping of our constitution which will fix a clear objective of budgetary equilibrium and will see the means of achieving it," Baroin, who is also budget minister, said. In exchange for other European partners agreeing, Germany appears ready to meet the demands of other euro members that the EFSF be given additional powers.Set up in May after the shock bailout of Greece, the fund has a headline number of 440 billion euros but for technical reasons can only lend about 250 billion euros.Germany now seems ready to boost its effective lending capacity to the full 440 billion and possibly allow it to lend to vulnerable countries like Greece so that they can repurchase their bonds at a discount.Euro zone sources in Brussels said governments of the currency bloc were also seriously considering letting the EFSF buy bonds of distressed governments on the primary market, when they are auctioned by the issuing country. The senior German official told Reuters that Berlin was coming around to the idea of reducing the interest rate the EU is charging Greece for the loans in its 110 billion euro bailout and extending the period over which those loans must be repaid -- although an extension to 30 years is seen as unlikely.The hope is that these steps would remove market fears that Greece will eventually have to restructure its debt, a risk that has kept Greek 10-year bond yields above 10% for months.German officials say they are still mulling whether to allow the EFSF to provide short-term credits to troubled euro zone members but have ruled out the idea of the facility itself buying the debt of single currency bloc members on the secondary market.The senior official said the broad anti-crisis package to be agreed in March would not include a deal on a successor to Jean-Claude Trichet as president of the European Central Bank.Bundesbank President Axel Weber is seen as the leading candidate to replace Trichet, whose term expires in October, but the German's public criticism of the ECB's bond-buying programme soured France and other southern euro states on his candidacy. 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