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EU leaders wrangle over debt crisis measures

By Gabriele Steinhauser

Associated Press

Published: Friday, Feb. 4 2011 3:40 a.m. MST

German Chancellor Angela Merkel, right, speaks with Greek Prime Minister George Papandreou, left, and French President Nicolas Sarkozy during a round table meeting at an EU summit in Brussels, Friday, Feb. 4, 2011. EU leaders meet for a one-day summit on Friday, with energy, the eurozone debt crisis and unrest in Egypt set to dominate the agenda.

Yves Logghe, Associated Press

BRUSSELS — The sense of panic over the fate of the euro and the 17-country currency union's weakest members has eased on financial markets, for the moment. But pressure on European leaders to finally get a grip on the continent's debt crisis has never been higher.

Investors are calmer because they have set their hopes on a "comprehensive package" of measures that, European Union officials promise, will dispel any doubts over the bloc's ability to deal with even the most severe shocks.

One thing is clear: If its contents disappoint, politicians will have missed their chance to finally get one step ahead of the bond market vigilantes that have so far driven the pace of the crisis and their response. At their summit Friday, EU leaders will wrangle over what exactly will go into that package.

"Now the challenge is for Europe to deal with some of the systemic problems of the eurozone, and I am very glad there is a realization and I believe more optimism about our will and our capability to do so," said Greek Prime Minister George Papandreou, whose country's debt woes kicked off the continent's crisis more than a year ago.

No firm decisions are likely before another summit at the end of March, Brussels diplomats warned ahead of the meeting, but Friday's get-together — originally convened to focus on energy and innovation — will provide a key opportunity to compare, and clash over, different ideas.

Among those is a Franco-German proposal on closer economic convergence among the 17 countries that use the euro, due to be presented by President Nicolas Sarkozy and Chancellor Angela Merkel over lunch with their European counterparts and Jean Claude Trichet, the President of the European Central Bank.

"These will be about improving competitiveness and at the same time making it clear that we have the political will to grow together, especially in the eurogroup, but other countries are also invited," Merkel said of the plans — dubbed the "pact for competitiveness" — as she arrived in Brussels.

The pact, widely leaked by government officials ahead of the meeting, calls on countries to introduce "debt brakes" into their national constitutions, align retirement ages with life expectancy and other demographic developments, get rid of automatic salary increases in line with inflation, create national bank resolution plans, and find a common basis for corporate taxation.

Berlin and Paris argue that commitments along those lines from eurozone governments are necessary to ensure caps on budget deficits that were widely ignored in the years before the crisis.

But the demands will be tough to swallow for some governments. Belgium and Luxembourg would have a hard time taking away automatic salary increases from their citizens, while the Irish — already feeling humiliated after being forced to take a €67.5 billion bailout — are unlikely to make any concessions on their corporate tax rate, one of the lowest in Europe.

Austrian Chancellor Werner Faymann, usually a supporter of German demands for more fiscal discipline, said that outside intervention in wage negotiations was "wrong," adding that he thought it was unlikely the EU would be allowed to regulate retirement ages.

For the Germans, however, it's clear that demands from the European Commission, the EU's executive, and some other countries to boost the size and powers of the eurozone's bailout fund only have a chance if Berlin gets something in return.

The "pact for competitiveness" is another example of close cooperation between France and Germany that has characterized the bloc's crisis responses in recent months.

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