BRUSSELS (MNI) – Eurozone finance ministers will meet in Luxembourg
later Monday against a backdrop of market anxiety over high debt and
deficit levels and even over the solidarity of the 16-country euro area
itself.

They are under increasing pressure to spell out exactly how they
plan to address key political and economic fault lines within the single
currency union.

Spiraling debt loads in some member states, extreme market
turbulence, and politically charged infighting have subjected EMU to
growing stress in recent weeks, putting downward pressure on the euro
and giving fodder to market skeptics who say the single currency is
destined to fail because it is a monetary union without an economic
union.

In a bid to shore up market confidence, Eurozone policymakers are
likely to say they’ll redouble efforts to reduce their budget deficits
more sharply if needed and fast-track plans to reduce intra-EMU
imbalances.

Financial markets remain wary about the long-term sustainability of
the Eurozone and the ability of the 16 member states to reduce their
debt burdens while returning to sustainable economic growth after the
recession.

Those fears have pushed the euro down in recent weeks. It has lost
more than 16% of its value against the dollar since the beginning of the
year, falling to under $1.20 in recent sessions — a far cry from its
heady pre-crisis high of $1.60.

The pressure on the euro continued even after Greece was bailed out
to the tune of E110 billion and the European Union and the International
Monetary Fund put together a E750 billion backstop fund to use in other
emergency cases.

Finance Ministers from the 16 euro-sharing countries, known as the
Eurogroup, will meet on Monday afternoon with European Central Bank
President Jean-Claude Trichet and European Commissioner for Economic and
Monetary Affairs, Olli Rehn.

In the evening they’ll be joined by finance ministers from the
other 11 European Union countries for a meeting of a task force led by
European Council President Herman Van Rompuy, which aims to improve
economic coordination within the Eurozone.

The Eurogroup will discuss the details of a E440 billion EMU
“special purpose vehicle,” which is part of the larger E750 billion
EU/IMF backstop fund.

“Work is still in progress on the SPV,” a source from the EU
Spanish Presidency said. “It will be launched as soon as possible; we
are pretty confident that will be in the month of June.”

But there’s a sense that more may need to be done to ensure market
confidence is regained.

As part of the E750 backstop deal, Spain and Portugal – whose high
debts are of concern to markets – agreed to implement additional
cost-cutting measures to bring down their debt and deficit levels.
Eurozone finance ministers will discuss those measures on Monday, as
well as Italy’s plans to slash its debt.

The Commission has yet to provide an official verdict on the
measures, but has said they are “ambitious” and “go in the right
direction.”

“The ministers are likely to underscore the need to take additional
measures if market turbulence requires,” a Spanish diplomat said. “These
measures would be on the expenditure side rather then the revenue side,”
the source said.

EU budget rules, set out in the Stability and Growth pact stipulate
that a country’s budget deficit must be less than 3% of its annual gross
domestic product and its general government debt must be limited to 60%.

But the impact of the financial crisis and a loose attitude to
enforcement of the rules has left most EMU countries with budget
deficits well above those limits. Greece is the worst offender, with a
budget deficit of 13.6% of GDP at the end of 2009.

One idea posed by the European Commission, the EU’s executive arm,
is to put greater emphasis on debt levels, rather than focusing just on
the deficit. Under such a scenario, a country could be forced to take
action if its overall debt burden were deemed too high — even if its
annual budget deficit were within the threshold.

The Commission has also suggested that the 27 European Union member
states coordinate the timing of their budgets and open them up for
greater peer review.

That idea is said to have “good support” from most EU finance
ministers though, as one official put it, “the devil is in the details.”
Plans are still at an embryonic stage and the level at which the budgets
would be scrutinized is not yet defined.

There is also talk of a “budget imbalance indicator,” controlled by
the Commission, which would highlight at an early stage those countries
in danger of overshooting specific targets.

Central to the negotiations is how much sovereignty 27 EU member
states are willing to surrender in the hope of gaining more stability
and market confidence. With two more task force meetings scheduled
before an outline plan is presented to Europe’s leaders at their meeting
June 19 and 20, its unlikely that concrete answers will emerge on
Monday.

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

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