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Pressure rises as euro debt deadline looms

Mar 06 2011 12:03 AFP

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Brussels - Europe faces mounting pressure this week to bridge a political chasm running from north to south, and right to left, over how to harmonise economic policy.

While the 27-state European Union is preoccupied by upheaval in Libya going into an emergency summit on Friday, markets are sounding ever more pessimistic about progress within the 17-nation eurozone towards resolving its debt crisis.

They are already on edge over high oil and food prices, with the knock-on effect that has on inflation and the eurozone already has plans for its own special summit in Brussels later the same day.

One major concern will be the decision by Fitch Ratings on Friday to downgrade Spain's sovereign credit outlook at the weekend.

Fitch Ratings is one of the three top agencies assessing borrower reliability and was a prime mover in Greece and Ireland's drift to the edge of the precipice last year.

Fitch moved Spain from stable to negative, with the agency blaming a weak economy, banking woes and big-spending regional administrations.

Fitch also warned that Spain could be punished if another summit on March 24-25 failed to produce a "credible and comprehensive" response to its stated goal of deciding the size, shape and scope of a financial rescue system.

Fitch's rating decision - and its warning on sorting out the rescue mechanism - came after EU leaders separated across old political faultlines on the how to solve the bloc's economic problems.

Right-wing leaders gathered in Helsinki, while the left met in Athens Friday and Saturday.

The near 2 500km distance was more than just symbolic.

One EU source close to negotiations on the "comprehensive" package EU president Herman Van Rompuy is negotiating described it as a "chess game" being played out against the clock.

He said Germany would not budge on boosting rescue funds and allowing those funds to buy up government bonds from weaker economies such as Portugal, unless Chancellor Angela Merkel could go to voters with "commitments from other countries to reform their economies."

In Helsinki late on Friday, Merkel rallied Europe's conservative majority behind a "competitiveness pact" first launched alongside French President Nicolas Sarkozy at an already fractious summit last month.

Designed to even out gaps in performance across the eurozone economy, it is presented as a condition for further rescue funding guarantees post-2013.

The centre-right European People's Party signed up to a call for states to open up national accounts to EU scrutiny, and face "clear sanction mechanisms" if they failed to comply with new fiscal rules.

However, demands which would see everything from wages, pensions or business taxation policies lurch to the right have angered the left.

In Athens on Saturday, Europe's socialists launched "an alternative to the Sarkozy-Merkel plan, for creating eight million jobs in Europe," according to Poul Nyrup Rasmussen, head of the Party of European Socialists.

"The European right wing is missing the big picture," their gathering concluded. "It ignores the causes and dimension of the multi-faceted crisis that threatens our economy and societies."

Other items on the socialist wish-list include the creation of joint eurozone bonds - which Germany fears would lead to a fiscal transfer union - and a tax on financial transactions.

But a call for a softening of what the left sees as rapacious interest rates for the Greek and Irish bailouts seems unlikely to go the distance.

Conservative EPP deputy head and incoming Irish Taoiseach Enda Kenny's own calls have failed to move their political allies in Helsinki.

"The real subject of the negotiations is what the current fund can do," said the EU insider of the fall-out over the Berlin-Paris pact.

"Can it buy up eurozone public debt or not? And will it be able to offer short-term credit lines to countries?

"On these issues, Germany and the Netherlands aren't moving much and if nothing happens there, the markets are likely to start attacking the weakest countries again."

An internal EU assessment of the state of play seen by AFP shows a welter of division in the detail: states are unable even to agree on how to calculate debt data.

Such basic differences suggest that major changes are almost certain to take years to be implemented.

eu  |  europe economy  |  europe debt crisis  |  markets  |  euro
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