After marathon talks on the Libya crisis, late last night eurozone leaders committed to a watered down set of demands to appease German angst over bailouts and clear the way for an agreement to increase the EU's rescue facility to 440bn euros from its current level of around 250 billion.
EU leaders agreed they would increase the guarantees they provide to the bailout fund to allow it to raise capital on international markets. This should ensure that the fund is capable of bailing out any eurozone states beyond Greece and Ireland that require assistance, with Portugal seen as the country next most likely to need financial help. Spain may follow after that.
While leaders agreed to lower the interest rate and lengthen the maturity on loans extended to Greece, giving Athens more time to repay its debts, they rejected Ireland's bid for relief as Prime Minister Enda Kenny refused to yield to calls to raise his country's 12.5% company tax rate. The leaders also declined to permit the fund to finance bond buy-backs of debt-ridden states.
"This is an important message on the political pledge of the euro members to fight for the euro’s stability," German Chancellor Angela Merkel said in Brussels in the early hours of the morning after the marathon summit had ended.
"Everyone had to make a contribution. I hope that this will also be a good message to the world in terms of the euro as a major currency," Merkel said.
A watered down pact for the euro
Leaders also backed Franco-German proposals for "a pact for the euro" spelling out demands to guarantee greater economic and fiscal policy coordination. The demands in the pact range from lowering wages to match productivity levels to lowering taxes on labour, linking pensions to life expectancy and greater tax policy coordination.
For example, member states will be asked to set wages so that they are in line with productivity and do not exceed those of their main trading partners.
The 17 eurozone countries will also be expected to implement agreed reforms outlined in the pact by no later than the release of their national reform programmes (NRPs), due out in April.
NRPs are reports that countries write every three years to show the European Commission that they are following the letter of the bloc's agreed long-term growth strategy, dubbed 'Europe 2020'.
The language used in the pact for the euro shows a significant shift from its mother paper, which was originally penned by the German Ministry of Finance.
Though never overtly stated, diplomats in Brussels intimate that the paper was authored by Berlin to tell countries that they cannot get loans based on Germany's credit rating without giving any guarantees in return, and to appease a German electorate furious about bailing out countries on the verge of bankruptcy.
Trade unions are up in arms at Brussels for interfering in how countries set wages and say the EU – or German – diktat is a "race to the bottom" that will only lead to less, not more, competitiveness.
"The Pact […] will force member states to enter into a competitive downward spiral of undercutting each others' wages and working conditions. This risks pushing the economy further towards deflation and depression," John Monks, general-secretary of EU trade union body ETUC, said yesterday.
In addition the European Parliament fears the pact will undermine a swathe of reforms that they are working on in conjunction with the European Commission and member states.
The 'six-pack' on economic governance, as it is being called in Brussels circles, includes a set of measures on how countries police debt and imbalances and punish those countries that do not take appropriate action to correct either.
MEPs have loudly complained about the creeping intergovernmentalism undercutting the EU legislative process which involves all three bodies: the European Commission, the Parliament and representatives of member states.
"But we can still hold them hostage," Liberal MEP Sharon Bowles, who leads the Parliament's economic affairs committee, told EurActiv, warning that EU leaders will first need to secure MEPs' approval in order to complete a deal on the six-pack.
So far the Parliament has injected 2,000 amendments into the six draft proposals and talks with member states will not begin until April.
All 27 EU leaders are due to meet again at the end of March to sign off on their version of the six-pack and to agree on increasing the European Financial Stability Facility's (EFSF) lending capacity to calm jittery markets.
