BRUSSELS (MNI) – Europe’s leaders agreed at their two-day summit
meeting here to set up a permanent mechanism to aid Eurozone states that
fall in to financial difficulty, but they postponed decisions on the
finer detail until their next encounter here in December.

The leaders also gave their approval to a controversial set of
proposals aimed at strengthening economic governance in the single
currency area, a move they said would strengthen the Euro.

The move to create a permanent crisis mechanism will require
“limited” changes to the EU treaties, European Council President Herman
Van Rompuy told reporters after the meeting. But the details of how such
a mechanism would work have still to be thrashed out, a process Van
Rompuy will lead in the coming months before the next EU leaders summit
on December 16 and 17.

EU diplomats said that work on the details will look at the role
the private sector should play in a future permanent crisis mechanism
and the role taken by the International Monetary Fund.

German Chancellor Angela Merkel – who led the charge to change the
treaty in order to create the permanent mechanism – said she is “very
satisfied” with the deal.

“There was a high degree of solidarity shown by my colleagues and I
thank them for that,” she said. “The euro will become overall more
secure by what we have decided today.”

Merkel came to the meeting lobbying for two things: a permanent
crisis mechanism which will allow the orderly default of a Eurozone
member, and a plan to suspend the EU voting rights of member states who
violate the economic rules.

While she failed to garner support for the second proposal, which
was dubbed a “non-flyer” by many of the leaders, her idea to incorporate
a mechanism for orderly default could yet be written into EU laws.

Europe’s policymakers have so far remained quiet on the topic of
allowing orderly default within the currency bloc, perhaps worried that
any comments would be interpreted as a reference to debt-stricken
Greece, which is currently surviving on a E110 billion life support deal
brokered by the International Monetary Fund and Greece’s Eurozone
partners.

Earlier this year, ECB Executive Board member Lorenzo Bini Smaghi
gave the European Parliament a hint about the options the European
Central Bank might favor to avoid contagion while limiting moral hazard.

“One way to prevent market participants from being bailed out is to
use the funds made available from the official support mechanism to
purchase debt on the secondary market, at the prevailing market
discount, rather than reimbursing the maturing debt at the nominal
value,” Bini Smaghi said. In effect, bond holders willing to sell would
be taking a haircut in this scenario.

Bini Smaghi also said that any restructuring “can be achieved in an
orderly way only through an agreement between creditors and debtors,”
and that it was important to agree on fair burden-sharing.

Merkel’s comments, at a press conference held after the EU leaders
summit on Friday, chimed with those Bini Smaghi made in September. She
said she wants to see involvement of the private sector and the IMF in
the permanent crisis mechanism.

And the German leader stressed again that it is “very crucial” for
Germany that private creditors shoulder part of the losses in the case
of a future sovereign debt crisis in the Eurozone.

Merkel secured backing for her position on the permanent crisis
mechanism from French President Nicolas Sarkozy, after she agreed to
back him in watering down a plan by the European Commission that would
have allowed for economic sanctions to be imposed quasi-automatically
with far less say from politicians. Instead, the Franco-German deal
means sanctions will remain at the discretion of Europe’s politicians.

Leading the opposition to the watered down proposal was European
Central Bank President Jean-Claude Trichet, who had refused to sign on
to the last minute agreement, which was incorporated in the report
produced by Van Rompuy and a task force that included European finance
ministers and Trichet himself.

“I don’t share the concerns that Jean-Claude Trichet has on this
matter,” Merkel told reporters after the meeting. She said the ECB’s
focus was on calming the markets, while the leaders had to take into
account national interests as well.

French President Sarkozy noted that Trichet had expressed his views
to the European Council, as it was his right to do, and that there was a
debate.

“But the European Council decided. It decided with unanimity, and
it gave the answer it wanted to give to Mr. Trichet,” he said.

In the conclusions of the summit, Europe’s leaders also warned
against currency devaluations to improve competitiveness and against
protectionism.

Europe’s policymakers have long argued that the level of the
Chinese currency is out of line with the country’s economic fundamentals
and is harming EU exports.

“The European Union emphasises the need to continue keeping markets
open, to inject momentum into the Doha negotiations and to adopt a
growth-oriented development agenda. It stresses the need to avoid all
forms of protectionism and to avoid engaging in exchange rate moves
aimed at gaining short term competitive advantages,” the summit
conclusions said.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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