–Adds Comments By German Lawmaker To Story Sent At 09:06 GMT

FRANKFURT (MNI) – The European Union should lower interest rates on
loans to Greece and Ireland and double Greece’s repayment period, in the
view of EU Monetary Affairs Commissioner Olli Rehn.

In an interview published Monday by the German business daily
Handelsblatt, Rehn reminded EU leaders that the markets are looking for
“a definitive answer to the debt crisis” to emerge from their summits
this month.

“If we disappoint market expectations, it could be costly for us,”
he warned. The turbulence on financial markets “is continuing. We are
not out of the woods yet.”

Rehn’s comments were accompanied Monday by a stark reminder:
Moody’s downgraded Greece’s sovereign debt to B1 from BA1, citing the
country’s difficulty in collecting tax revenue; the long, hard road it
faces in implementing its consolidation and reform package; and the risk
of a sovereign default.

“The government leaders must commit to strict budget consolidation
and growth-enhancing reforms, especially for labor markets,” Rehn said.
“They must also decide that all wobbly banks will be restructured and
recapitalized. In addition, they must strengthen the euro rescue
package.”

The new Irish government must stick to the savings and reform
program agreed with the Eurozone and the IMF — “without modification,”
Rehn insisted. “However, we must also ensure that Ireland can repay its
debt over time.”

“The Eurozone should lower the borrowing rates for Greece and
Ireland,” he argued. “In addition, the duration of loans for Greece
should be extended from three and a half years to seven.”

The commissioner reiterated his opposition to haircuts on debts of
the two countries, warning that this could force banks to write off
billions in loans and lead to “dramatic” losses for sovereign debt of
other Eurozone countries.

He urged the German parliament to rethink its opposition to
allowing the European Financial Stability Facility (EFSF) to buy back
government bonds, citing the “great risks” that several Eurozone
governments are facing and the eventual fallout for Germany.

Klaus-Peter Flosbach, the parliamentary financial speaker of
Chancellor Angela Merkel’s CDU/CSU bloc, told the online edition of
Handelsblatt today that the EFSF mandate should not be broadened.

“I think it would be wrong to widen the authority of the crisis
mechanism and thereby shift the risks from an unsound economic policy
ever more to the taxpayer,” Flosbach was quoted as saying.

Rehn said wage policies must be a central element of the Eurozone
reform package, and he proposed unit labor costs as key barometer for
competitiveness. He favored decentralized wage negotiations based on the
productivity of individual companies.

Rehn also noted growing determination to harmonize tax policy
throughout the Eurozone and said the Commission this month would propose
a yardstick for unified corporate taxes.

At the same time, he warned against forcing Dublin to hike
corporate taxes: “We must avoid all risks for the Irish economy.”

In a separate interview with the French business daily Les Echos,
EU Taxation Commissioner Algirdas Semata explained that the Commission
would propose a single corporate tax base for the EU and that business
activity be taxed at the level of existing rates in each member country.

The distribution of a firm’s activity across the EU would be
determined for one third each according to turnover, capital and assets,
and staff and salaries, he said. “These factors are closely linked to
profits; they are clear and easy to calculate.”

“The great majority of firms are favorable to our proposition,
especially since it should help attract more foreign investment to
Europe,” Semeta said, adding that if there were no full accord among all
27 EU states, a smaller group could initially proceed with the
harmonization of the tax base.

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