Pakistan Today

France vows powerful summit deal

President Nicolas Sarkozy and Chancellor Angela Merkel will lay out a plan to amend the EU treaty to anchor stricter budget discipline in the euro area, aiming to restore market trust and prevent the sovereign debt crisis spiraling out of control.
A French minister said the leaders of France and Germany would not leave Friday’s European Union summit until a “powerful” deal is reached to arrest the crisis. But while Paris voiced determination, a senior German official gave a deliberately downbeat assessment of prospects for an agreement in an apparent effort to jolt partners into accepting Berlin’s terms and restrictions.
“I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal … A lot of protagonists still have not understood how serious the situation is,” the official told a pre-summit briefing.
“My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for,” he said, speaking on condition of anonymity.
The euro slipped, European share prices turned negative and safe-haven German bond futures rose after the official dented investors’ hopes of a comprehensive solution.
U.S. Treasury Secretary Timothy Geithner, whose fourth trip to Europe in as many months speaks of the alarm in Washington at the damage the debt crisis could wreak on the U.S. economy, backed the Franco-German plan to impose mandatory penalties on euro states that exceed deficit targets and bring forward a permanent rescue fund.
“I have a lot of confidence in what the president of France and the minister are doing, working with Germany to build a stronger Europe,” Geithner told reporters after talks with French Finance Minister Francois Baroin. “Neither Nicolas Sarkozy nor Angela Merkel will leave the negotiating table of this summit until there is a powerful deal,” Baroin told Canal+ television. Figures released on Wednesday showed just how urgently some European banks need help.
Italian banks had to borrow 153.2 billion euros in emergency liquidity from the ECB in November, up from 111.3 billion euros at the end of October, Bank of Italy data showed, another big leap in reliance on the central bank which has almost quadrupled since June, when Italian lenders took 41.3 billion euros.
Euro zone banks took more than $50 billion in the ECB’s first dollar funding operation since the world’s leading central banks agreed last week to cut their cost, five times the $10 billion forecast in a Reuters poll of money market traders. And Germany is set to reactivate a bank rescue fund created at the height of the 2008 financial crisis at next week’s cabinet meeting, a government official said.

FLY ME TO THE GLOOM

The ECB’s governing council holds a crucial meeting on Thursday, before the EU summit, at which most economists expect it to cut interest rates to 1.0 per cent from 1.25 per cent, introduce longer-term liquidity tenders for banks and widen the collateral they can use to borrow from it. ECB President Mario Draghi, who met Geithner on Tuesday in Frankfurt, has signaled that a euro zone “fiscal compact” could encourage the ECB to act more forcefully.
Ratings agency Standard & Poor’s heightened the sense of crisis this week by warning it could cut credit ratings across the 17-nation currency bloc, including for its EFSF rescue fund, a move that would fundamentally weaken it.
A Reuters poll of 13 economists found 11 expect France to lose its top-notch AAA credit rating within three months, a potential blow to Sarkozy’s re-election bid.
Two days before the summit, new ideas bubbled about how to boost the euro zone’s crisis capabilities. EU officials said leaders could decide to raise the combined lending limit of the temporary EFSF rescue fund and its successor, the permanent European Stability Mechanism, which France and Germany want introduced a year early, in 2012.
But the German official said he could not foresee running the two funds simultaneously. He also objected to talk of issuing common euro zone bonds as a longer-term solution.
A Franco-German letter sent to European Council President Herman Van Rompuy, who will chair the meeting of 27 EU leaders, went beyond the treaty change proposal announced on Monday.
Merkel and Sarkozy called for a new EU fast track for progress on creating a common corporate tax base, a financial transaction tax and labor market regulations — ideas that are anathema to EU members such as Britain and Ireland.
“A new common legal framework, fully consistent with the internal market, should be established to allowing for faster progress in specific areas,” the letter said. The framework should also cover financial regulation, growth supporting policies and more efficient use of European funds in the euro area, it said.
With much of Europe facing a relapse into recession in the coming months, airlines worldwide face severe losses next year unless Europe’s politicians get to grips with the region’s debt crisis, the industry’s leading trade group warned.
The International Air Transport Association (IATA) shaved its main forecast for industry profits to $3.5 billion for 2012, and said the industry could plunge to an $8.3 billion loss with no region of the world exempt if Europe’s debt woes precipitate a new banking crisis.

COST TO GERMANY RISING

Van Rompuy has proposed giving the permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding, but Germany has opposed the move, saying it would breach a ban on the ECB financing governments.
Another German government source said Germany’s net new borrowing could rise beyond the 26.1 billion euros planned for next year if euro zone leaders move forward the permanent European Stability Mechanism to 2012.
Sarkozy and Merkel want treaty changes to be agreed in March and ratified before the end of 2012. If some countries block treaty change for all 27 EU members, the 17 euro states could proceed with an agreement on their own.
Van Rompuy says tighter budget oversight sought by Paris and Berlin for the euro area could be achieved quickly with only minor tweaks to the EU treaty, which might not require full ratification procedures in many countries.

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