Strauss-Kahn urges EU states to step up response to sovereign debt crisis

Wed, Dec 8, 2010, 00:00

EUROPEAN FINANCE ministers gave their formal endorsement to Ireland’s EU-IMF rescue plan as IMF managing director Dominique Strauss-Kahn urged them to step up their response to sovereign debt crisis.

The rescue plan compels the Government to adopt a “fiscal responsibility law” to introduce a medium-term expenditure framework with “binding multi-annual ceilings on expenditure in each area” to support the recovery of the public finances.

The Government must also establish a “budgetary advisory council” to provide an independent assessment of its budgetary position and forecasts.

The agreement was amended yesterday in response to concerns raised by British chancellor George Osborne about Britain’s exposure to the operations of Irish banks in the North and Britain.

The change commits the European Commission, the European Central Bank and the IMF to “involve, as appropriate, member states” in the “design and implementation” of a new liquidity assessment of Ireland’s financial institutions.

As Minister for Finance Brian Lenihan unveiled a €6 billion budget package for 2011 in the Dáil, the bailout deal endorsed by his fellow ministers commits Ireland to adopting at least €3.6 billion in “consolidation” measures for 2012 including €1.5 billion in tax increases and €2.1 billion in cutbacks.

Mr Lenihan last night said he did not think “any further interventions are required in Ireland”. The “degree of disturbance” at European level requires “a European response”, he added.

The agreement approved yesterday by EU ministers said Ireland “should adopt implement the fiscal rule that any unplanned revenues in 2011-2015 will be allocated to deficit and debt reduction”.

“Ireland shall adopt and implement additional consolidation measures to ensure macro-financial stability, in case such measures will be necessary during the assistance programme.

“The Irish authorities shall consult the commission in advance of the adoption of any such additional measures.”

The agreement, which summarises the terms of the four-year plan and Ireland’s memorandum of understanding with the European Commission and the IMF, confirms that the budget deficit must be brought below 3 per cent in 2015.

Reflecting lower growth prospects due to the increase in budget austerity measures, this is one year later than previously agreed by EU ministers.

The deal compels the Government to start charging for water services in 2012/2013. Legislation must also be passed to increase the pension age to 66 in 2014, 67 in 2021 and 68 in 2028 while pension entitlements for new entrants to the public service must be reformed with effect from next year.

“The commission shall verify at regular intervals the economic policy conditions attached to the assistance are fulfilled,” the documents state.

“To this end, the Irish authorities shall place all the necessary information at the disposal of the commission and co-operate in full with the latter.” After Mr Strauss-Kahn urged euro finance ministers at a meeting on Monday night in Brussels to enlarge their €750 billion bailout fund, he said in Athens yesterday that the “piecemeal” approach to the crisis was not a good one.

“The euro zone has to provide a comprehensive solution to this problem,” he said after a meeting with Greek prime minister George Papandreou.

Although diplomatic sources said Mr Strauss-Kahn had made clear his dissatisfaction with the response of the EU authorities on Monday night, European Council president Herman Van Rompuy later told reporters that there was “no problem” with the size of the existing bailout fund.

“There is no need to increase the means available for the facility. It is no problem at all. If needed we will consider, but that is not a question today,” he said.

Germany and the Netherlands oppose any increase in the fund but diplomatic sources say the question is now on the table.

Any immediate aid for Portugal or Spain was ruled out yesterday.