E.U. summit highlights rift over currency crisis

German Chancellor Angela Merkel, whose flush government would have to pay most of the bill, nixed the idea of issuing
German Chancellor Angela Merkel, whose flush government would have to pay most of the bill, nixed the idea of issuing "euro bonds." (Thierry Roge)
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By Edward Cody
Washington Post Foreign Service
Saturday, December 18, 2010

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

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 Thursday and Friday to deal with the growing threat to their common currency, the euro, from debt-mired governments. 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 another pledge 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 in two years.

The European Council president, Herman Van Rompuy, said the 27-nation European Union was already making itself "crisis-proof" and there was no need 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."

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 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.

More recently, Portugal and Spain have shown signs of strain, leading to fears that they could be next. Spain was recently warned by Moody's that its rating is under close scrutiny.

The permanent rescue fund was agreed upon in principle, including a change to the basic E.U. treaty to make it possible. But long negotiations loomed over how much each government will ante up and the conditions under which loans will be granted.

Merkel pushed hard for tough criteria, arguing that Germans are tired of paying for fiscal legerdemain in other E.U. countries.

Nicolas Veron, an economic analyst at the Bruegel research institute in Brussels, said the European Union's failure to take bold measures to parry the threat to the euro stems in large measure from the vast differences among its 27 economies. The gaps exist even among the 16 euro countries, he noted, and have only been papered over by the use of a common currency, for which some of them perhaps were not ready.

"I think it's normal that the euro crisis is difficult to deal with," Veron said. "The European Union has always put the cart before the horse."

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