–Central Bankers, Fin Mins To Discuss Rules At Madrid Meet
By Emma Charlton
MADRID (MNI) – Europe’s finance ministers and central bankers, who
will gather for two days of talks here Friday and Saturday, are
preparing to debate how to enforce fiscal discipline in a way that can
help avoid a repetition of the Greek debt crisis.
The Madrid talks will be informal, in preparation for a European
Commission proposal May 12. Worries about legal treaty changes,
sovereign infringement, and a two-speed Eurozone recovery could hamper
negotiations in the longer term, and there’s a risk of a drawn out
debate with unsatisfying results, EU diplomats and economists said.
Financial markets continued to pressure debt-ridden Greece this
week, even in the light of a E30 billion Eurozone support offer last
weekend. Many fear that worries about high debt and deficit levels in
other Eurozone countries could cause similar problems elsewhere in the
currency union.
Both Greek and Portuguese sovereign bond spreads widened over the
German Bund Thursday, reflecting market fears about deficit levels in
those countries and the ability of their governments to bring their
budget deficits back below the EU’s 3% threshold. Greek paper was also
under pressure because of lingering market frustration over
still-unanswered questions with regard to the Greece aid package.
The spread on Greek 10-year bonds rose Thursday as high as 427
basis points above benchmark German Bunds, after starting the day at 394
bps. The spreads later narrowed, and were last trading at 399 bps, after
the Dutch Parliament voiced support for the EMU aid deal and Greece
called for a meeting with the ECB, European Commission and IMF to
discuss it.
At the meetings in Madrid, chaired by Finance Minister Elena
Salgado of Spain, which currently holds the rotating chair of the
European Union, European Commissioner for Economic and Monetary Affairs,
Olli Rehn will present the Commission’s ideas for strengthening national
budget policies and enforcing the EU rules.
A European Commission spokesperson said the policymakers would then
discuss their ideas and those discussions would form the basis of a
paper, to be produced by the European Union’s executive arm on May 12,
ahead of the next formal meeting of finance ministers in Brussels on May
17-18.
The Commission wants to see a three-pronged approach to reinforcing
the rules: better application of the Stability and Growth Pact budget
rules, deeper and broader surveillance, and a permanent crisis
resolution mechanism to enable it to deal with situations like the one
in Greece.
“The latest developments in the European economy, not least in and
around Greece, have shown that there is a pressing and urgent need to
strengthen economic policy coordination,” European Commissioner for
Economic and Monetary Affairs Olli Rehn told reporters in Brussels on
Thursday.
Rehn, probably mindful of how the EU budget rules were watered down
under pressure from France and Germany in early 2005, stressed the need
to act now while there is political will in the aftermath of the crisis.
But despite the renewed political will, the process is likely to be slow
and complicated, even after the Commission floats its initial ideas in
May.
“The disjointed negotiations to agree support for Greece – and the
persistent doubts about whether any money will actually be forthcoming
from the likes of Germany – have highlighted that there are significant
differences of view among euro area economies,” said Colin Ellis, an
economist at Daiwa Capital Markets in London.
“Germany, in particular, is likely to play hard ball. As such, even
though most members probably agree on the need for tighter rules…I
think it will take some time before a meaningful agreement is reached,”
Ellis said.
In addition to concerns about legal issues and sovereignty
infringement, there’s a growing gap between countries like Germany, who
want to see stricter rules and the potential for disobedient countries
to be kicked out of EMU, and others who feel the focus should be on
greater coordination at the Eurozone level and stronger crisis response
mechanisms.
A widening growth gap between the North and the South could
influence the negotiations, since the economies of Germany, France and
the BeneLux countries are considered likely to strengthen gradually,
while growth in the Mediterranean economies and Ireland will be held
back by efforts to reduce their budget deficits.
Forecasters at Ernst and Young predict that growth in the
Mediterranean economies and in Ireland will average only 0.6% per year
over 2010-12, compared with 1.8% per year in Germany, France and
BeneLux.
Commissioner Rehn Wednesday dismissed the notion of a split in
opinion between the stronger and weaker economies. “All member states,
small or large will comply with the treaty,” he said.
As well as strengthening the way the treaty rules are enforced, the
European Commission also discussed creating “a safety net of last
resort,” to help heavily-indebted countries.
Rehn said the safety net would come with strict conditions that
would be “so unattractive that no country wants to end up in such a
situation.”
But the creation of such a mechanism also is likely to face
objections from some countries and could encounter legal difficulties.
Rehn – who took up his position as the EU Commissioner for Economic
and Monetary Affairs earlier this year – has said that reinforcing the
rules is one of his “top priorities, if not the top one.”
The test, as ever, will be achieving a consensus among 27 European
governments and preventing the Commission’s legislative proposals being
watered down in the negotiating process.
–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com
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