EU leaders bid farewell to euro's horrible year

By Raf Casert

Associated Press

Published: Friday, Dec. 17 2010 12:00 a.m. MST

European Council President Herman Van Rompuy gestures while speaking during a media conference at an EU summit in Brussels, Thursday, Dec. 16, 2010. The European Union's president says EU leaders are ready to do whatever necessary to save the embattled euro currency.

Virginia Mayo, Associated Press

BRUSSELS — European Union leaders capped the euro's year of doom with renewed resolve to protect their battered common currency. But even after their seventh summit in a chaotic year, markets failed to take heed, leaving the leaders baffled. Again.

After dark Thursday, the government leaders vowed to use all their financial might to protect troubled member states. Before dawn Friday, a major ratings agency downgraded the creditworthiness of a troubled EU economy — Ireland — paying scant attention to all their pledges and promises.

Thus was the year in Europe, when the euro, meant to weld former foes together forever, fell prey to a market that saw debt, deficit and outrageous spending where governments saw political ideals.

"I don't understand what they do," French President Nicolas Sarkozy said of Moody's slashing of Ireland's credit rating and warning of further downgrades. "This decision — I simply call it stunning."

Throughout 2010, markets have all too often seen government as a step behind events — and been seen by leaders as reacting beyond reason.

"It is excessive, if I may say so," Irish Prime Minister Brian Cowen said, arguing his drastic budget cuts to rein in a runaway deficit deserved better.

Yet, Ireland's damage was already done.

"It's always too little, too late," Professor Paul de Grauwe of Leuven University said of the EU's reaction to the year-long crisis. "They've waited too long to give a message to the market."

In the latest attempt to keep the eurozone of 16 nations unraveling further, EU leaders decided Thursday at their last meeting of the year to change the treaty that underpins the bloc to make room for a new rescue system for countries that get into debt trouble in the long term.

And Sarkozy and German Chancellor Angela Merkel joined forces on Friday in announcing plans to reduce the huge differences among the euro economies that market players exploited all year long.

That will likely mean a bigger attachment to tough EU standards in economic policy, social policy and possibly taxation — areas that member states have long tried to keep in national capitals and out of the common EU realm.

"This year has definitely pulled us closer together than we would have expected two or three years ago," Merkel said Friday.

But certainly not in the way any would have expected.

Greece started the crisis off, with the revelation late last year that it had been fudging its statistics to mask a massive deficit and debt. And after giving up the German mark, French franc and Italian lira a dozen years ago, many European taxpayers were livid they had allowed the Greek drachma to poison the common currency.

Markets pounced on the perceived weakness of the euro, a currency that's become a standard-bearer along with the dollar and the Japanese yen on international market.

Some charge that the Greek government and the EU didn't match the market speed in reaction, and governments are still trying to catch up.

"The market can react by computer in a fraction of a second in the interest of profit, sometimes speculation. it has nothing to do with the building of Europe where 27 nations have to agree," Sarkozy said.

Improvising as they went along, some finance ministers like France's Christine Lagarde even acknowledged panic in the dead of night on May 9 just before the EU joined the International Monetary Fund to pledge nearly $1 trillion to backstop financially troubled euro members.

The sheer size of the fund was thought to be sufficient to repel any more financial speculation.

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