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E.U. summit highlights rift over currency crisis

The 16-nation euro currency zone is beset by fissures between strong economies such as Germany and weaker ones such as Greece, Ireland and Portugal, which risk being engulfed by historic levels of government debt.

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By Edward Cody
Washington Post Foreign Service
Friday, December 17, 2010; 10:07 AM

BRUSSELS - The perennial Luxembourg prime minister, Jean-Claude Juncker, proposed issuing "euro-bonds" to raise capital for Europe's dangerously indebted economies. His colleague the Italian finance minister agreed.

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But Chancellor Angela Merkel of Germany, whose flush government would have to pay most of the bill, said it was a terrible idea. And if Merkel disagreed, with all her euros, then so did her neighbor and ardent European partner, President Nicolas Sarkozy of France.

Against a backdrop of discord and hesitation among its most influential members, European Union leaders held a summit here to deal with the growing threat to their common currency, the euro, from governments so mired in debt they can no longer borrow at affordable rates in international financial markets. Because of the differences over what to do, two days of discussions produced only a broad agreement to establish a permanent European rescue account when the current $975 billion emergency fund runs out - in 2013.

In the meantime, the leaders issued a pledge - another in a series - to do whatever is necessary in the months ahead to prevent the euro from getting dragged down by bankruptcies among the 16 E.U. governments that use the common currency.

"The heads of state or government of the euro area and the European Union institutions have made it clear that they stand ready to do whatever is required to ensure the stability of the euro area as a whole," said a closing communique. "The euro is and will remain a central part of European integration."

Juncker's e-bonds idea was kicked down the field, but he insisted it will return to the fore later. Also put off was a suggestion from the International Monetary Fund's managing director, Dominique Strauss-Kahn, to stop dealing with the crisis country-by-country and inject more money into the emergency fund to bolster market confidence until the permanent fund, the European Stability Mechanism, can be set up two years from now.

The European Council president, Herman Van Rompuy, said the 27-nation European Union was already making itself "crisis-proof" and there was no need at the moment to increase resources for the emergency fund, the European Financial Stability Facility. Only 4 percent of the fund has been used, he said, and plenty of cash remains if another country gets into trouble.

"The problem doesn't arise," he told a news conference. "But if it ever did arise, we will do whatever is necessary."

Merkel agreed, saying the emergency fund needed no extra cash to convince the markets. "We are doing everything to make the euro secure," she told reporters.

Van Rompuy declined to say what steps might be taken if another country edges up to default, suggesting that several ideas were under study but that no decisions had been made.

"Elements of this strategy will be further developed in the coming months as a comprehensive response to any challenges as part of our new economic governance," the communique promised.

Despite the show of resolve, the rating agency Moody's Investors Service announced Friday that it has downgraded the Irish government's creditworthiness by five notches and put Greece on notice that it, too, might soon be further downgraded. Both governments were rescued earlier this year by their E.U. partners after rolling up such high public debts that they could no longer raise funds on financial markets without paying prohibitive interest rates.


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