EU debates cracking down on deficits, debts

By Gabriele Steinhauser

Associated Press

Published: Thursday, Oct. 28 2010 8:58 a.m. MDT

BRUSSELS — Germany and France faced a struggle Thursday to get skeptical EU partners to endorse new rules on state spending, which they say are needed to prevent another government debt crisis in Europe.

German Chancellor Angela Merkel and French President Nicolas Sarkozy headed to a two-day EU summit in Brussels seeking a permanent crisis resolution mechanism, which would force private creditors to bear some of the cost of bailing out a highly indebted country.

The leaders of the EU's two largest nations have also backed new rules to strip EU voting rights from repeat overspenders, a measure some officials say will not pass.

Both demands are likely to require changes to the basic EU treaty — an arduous process that may take several years. Getting approval for the current Lisbon Treaty from 27 governments took 10 years, after Dutch and French voters killed an earlier version in 2005. Irish voters have also repeatedly dismissed treaty amendments.

European Commission President Manuel Barroso called losing voting rights "unacceptable," adding that it would never get approval from all 27 EU governments.

This view was echoed by several European leaders and EU officials. "We are very very critical" of changing the EU treaty, said Austrian Finance Minister Josef Proell.

However, Merkel has made support for treaty changes a condition for her backing of stricter rules for overspending governments, which are also on the table at the summit. EU finance ministers last week endorsed early warnings and potential fines for violators of the EU's debt and deficit limits.

German officials argue that it might only require very minor tweaks of the treaty to create the legal foundation for a permanent crisis resolution mechanism. That, they say, might allow governments to avoid difficult referendums in their home countries.

On Thursday, Merkel won some support for limited treaty changes. Swedish Prime Minister Fredrik Reinfeldt said, "We support a permanent crisis mechanism," but added that his government wouldn't back the stripping of voting rights. He said he would accept changing the treaty "if we can get it to be small and not create a problem for everyone else."

Greek Prime Minister George Papandreou said his country would have "no problem in terms of changing the treaty," as long as "this to be done in a way which is not prejudiced, does not pre-judge the stance of every member state."

The debt crisis that has gripped Greece and Ireland — and to a lesser extent Portugal and Spain — has left the 16-nation eurozone scrambling for stricter enforcement of rules aimed at keeping governments from running big deficits and undermining the shared currency. Greece needed a rescue loan to avoid bankruptcy earlier this year, a crisis that sent shock waves through the currency union.

Even before the financial crisis of 2008, many EU countries broke limits on deficits and public debt of 3 percent and 60 percent of GDP respectively.

Existing provisions to punish overspending governments were never enforced as EU governments lacked the political will to punish fellow members of the club. Caps on deficits are needed because overspending can undermine the euro.

But German Chancellor Angela Merkel says even more enforceable limits aren't enough to prevent another debt crisis. Together with France, she is pushing for a permanent mechanism that would force private creditors to shoulder part of the cost of risky lending to a highly indebted country — either by rescheduling of repayments or accepting a so-called haircut, a reduction of the total sum they are owed.

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