Brussels: European Union (EU) leaders are changing the treaty that underpins the bloc to make room for a huge new rescue system for countries that get into debt trouble in the long term. But they aren’t ready to beef up the bailout fund they have in place today.
That resistance to bold, fast moves now, led by Germany, the region’s economic engine, marked a summit of EU leaders wrapping up Friday.
Pressure on the leaders mounted after a rating agency revealed new worries about Greece, where protests against debt-driven austerity measures turned violent this week. Spain, which many economists warn is too big to bail out with the existing €750 billion ($992.85 billion) fund, also faced worryingly higher borrowing costs Thursday.
But policymakers meeting Thursday night in Brussels stressed that, for now, the pot of money is big enough.
“There will be no enlargement and deepening of the volume” of the fund, said Jean-Claude Juncker, the Prime Minister of Luxembourg who also heads the group of 16 countries that use the euro.
EU President Herman Van Rompuy insisted that only about 4% of the region’s bailout fund has been utilized since it was introduced in May.
However, he said that “the heads of state and government of the eurozone stand ready to do whatever is required to ensure the stability of the eurozone as a whole.”
Van Rompuy spoke after EU leaders agreed to change their central treaty to allow for a permanent rescue plan for countries that run into financial trouble after 2013, when the existing bailout fund expires.
The treaty change contains no details on the new rescue plan, which won’t come into force until 2013, but is a necessary legal step.
The two-sentence addition to the treaty will allow countries that use the euro to “establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro as a whole.”
Any aid to heavily indebted countries under the new mechanism would be subject to strict conditions, similar to the steep budget cuts and measures to improve economic competitiveness imposed on Ireland and Greece in their bailouts.
EU leaders had agreed to set up the so-called European Stability Mechanism at their previous summit in October and finance ministers outlined its broad features at the end of November.
It will be more than just a bailout fund. In a first step, it will provide rescue loans to countries that face a crisis of liquidity that is, if they can’t access money quickly enough to pay off their debts. Crucially, however, the ESM will also be able to force private creditors to assume some losses when a country is deemed insolvent.
“This is a major economic decision,” said Jose Manuel Barroso, the head of the EU’s executive Commission.
Champions of the mechanism argue that it is necessary to protect taxpayers in economically strong countries like Germany from having to pay for the profligacy of ’peripheral’ countries like Greece or Portugal. It will also help prevent states from building up unsustainable debts in the future, as investors will push up interest rates in light of potential losses on their bonds.
“Everybody has to stick to the rules and avoid that suddenly the Dutch taxpayer has to suffer for the abuse in Greece. Up to now, countries could get away with it,” Dutch Prime Minister Mark Rutte said.
Finance ministers of the 27 EU nations will now begin working out details of the new mechanism, including how much money eurozone nations are willing to chip in and when exactly private creditors would be involved.
A plan by Luxembourg’s Juncker to introduce pan-European bonds to stabilize funding costs for weaker euro members also found no takers given strong opposition from Germany. But Juncker said he believed the final word on the bonds had not yet been spoken.
As leaders were meeting in Brussels, more questions arose over their current strategy to tackle the crisis.
Moody’s Investors Service warned that “a multi-notch downgrade” of Greece’s bonds was possible, since the country’s debt turned out to be even bigger than expected. Greece was only saved from default in May by a €110 billion rescue loan from other eurozone nations and the International Monetary Fund (IMF).
The rating agency warned that support for the struggling nation might be less strong in the future than it had previously assumed.
The government in Athens is facing growing discontent from its citizens. A general strike escalated into violence Wednesday, as unions and other demonstrators protested salary cuts and weakened collective bargaining powers.
The European Central Bank on Thursday sent a strong political signal to EU leaders that they need to do more to salvage their joint currency, saying it needed to almost double the size of its capital coffers, which have been strained by its investments in vulnerable government bonds.
It is the first time in its almost 12-year history that the ECB has asked national central banks for a capital injection.
Meanwhile, Spain - the eurozone economy many view as too big to bail out, had to pay significantly higher interest rates to borrow €2.4 billion ($3.21 billion) from bond markets Thursday.