BRUSSELS (AP) — Led by Germany and France, EU leaders agreed Friday to work for closer economic cooperation amid market turmoil over towering debts in countries across the continent.
The leaders made progress at a summit in Brussels on a new rescue system for future debt crises but decided not to beef up the their existing bailout fund — further worrying ratings agencies and other market players who say the union needs to do more right now to keep the euro intact.
The union is wrapping up a punishing year that has rocked the world’s confidence in its ambitious experiment to share a currency.
French President Nicolas Sarkozy said he and German Chancellor Angela Merkel will present new proposals in the first weeks of 2011 to reduce differences among the economies that use the euro.
“We have to tackle the competitiveness gaps within the 16 eurozone nations,” he said.
Mrs. Merkel said they have no firm ideas yet, but may look at stable budgets or compare social security systems across the region.
Differences among states from powerhouse Germany to debt-saddled Greece came to the fore this year, as the union had to bail out two members and held countless meetings to stabilize the euro.
“Monetary union requires an economic union, nobody can avoid this destiny,” said Belgian Prime Minister Yves Leterme, whose country holds the EU’s rotating presidency.
Mrs. Merkel said Europe “grows ever closer together, sometimes at different speeds.”
Markets seemed little moved by the one firm financial decision the EU leaders have made at this summit: to change the treaty that underpins their bloc to allow for a permanent rescue plan for countries that get buried in debt beyond 2013. That’s when the current euro750 billion ($992.85 billion) bailout fund expires.
EU governments had decided to set up the long-term European Stability Mechanism at their previous summit in October and finance ministers outlined its broad features at the end of November. This week’s decision gives it the necessary legal basis.
Finance ministers of the 16 states that use the euro will now begin working out details of the new mechanism, including how much money eurozone nations are willing to chip in and when exactly private creditors would be involved.
“It is very difficult to say today what the capacity will be,” Mrs. Merkel said. “but it will have to be sufficient to convince all those who rely on it.”
The mechanism is more than a bailout fund. It will provide rescue loans to countries that face a crisis of liquidity — that is, if they can’t access money quickly enough to pay off their debts. Crucially, however, the ESM will also be able to force private creditors to assume some losses when a country is deemed insolvent.
Champions of the mechanism argue that it is necessary to protect taxpayers in economically strong countries like Germany from having to pay for the profligacy of ’peripheral’ countries like Greece or Portugal.
But analysts warned that the new mechanism didn’t address the region’s existing debt woes.
“The new ESM should safeguard the eurozone’s financial stability in the future,” ING economist Carsten Brzeski said in a note. “However, it is to some extent window-dressing as it does not solve the current crisis. European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”
Many economists warn that anemic or nonexistent economic growth, paired with anxiety about the health of the banks and surging borrowing costs, will make it difficult for countries like Greece, Ireland, Portugal or possibly much larger Spain to pay off their debts.
Those concerns were echoed in a warning over Ireland’s debt Friday.
Rating agency Moody’s Investors Service downgraded Ireland’s government bonds by five notches, citing the country’s ailing banking sector, which was the main cause for a massive bailout from the EU and the International Monetary Fund last month. The downgrade follows warnings over the ratings of highly indebted Spain, Greece and Belgium earlier this week.
Raf Casert in Brussels contributed to this report.
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