EU strategy in defence of euro risky for markets

EU LEADERS have adopted the “high risk” strategy of holding in reserve any new measures to escalate their defence of the euro…

EU LEADERS have adopted the “high risk” strategy of holding in reserve any new measures to escalate their defence of the euro as they prepare to revise the Lisbon Treaty to create a permanent bailout scheme for distressed single currency countries.

With Spain under renewed pressure on the eve of a key summit after Moody’s rating agency warned it might downgrade its debt, well-placed diplomats said European leaders were unlikely to bolster their temporary bailout fund or expand its remit until such time as that could be justified to national parliaments.

While the leaders are divided over the scale and scope of any new interventions, the strategy of trying to ride out tension in financial markets without publicly declaring their hand is widely acknowledged to be a risky one which could expose them to an upsurge in volatility.

According to a senior European diplomat, one of the key problems they face is that they have no formal process in train to assess the merits of complex proposals which would have financial and political implications for their governments.

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The leaders will discuss their response to the crisis at their summit dinner this evening in Brussels. They are before then to sign off on a narrow treaty amendment to empower euro countries to set up a rescue mechanism the use of which will depend on strict conditionality.

Diplomats believe the measure will not necessitate a referendum in Ireland, thus meeting the key objective of Taoiseach Brian Cowen when he agreed in October to reopen the treaty. This is because the mechanism will be established as an inter-governmental body operating outside the remit of the EU institutions and, therefore, will not transfer power to the EU.

Although some last-minute haggling is expected over the text of the amendment, European diplomats said the basic text remains as agreed last week when endorsed by national ambassadors.

The mooted amendment would add a paragraph to article 136 of the treaty, which deals with the euro, and will be executed by way of a simplified revision procedure reserved for measures which do not increase the competences of the EU.

“The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality,” it says.

However, German chancellor Angela Merkel was still pressing last night to include a reference to the mechanism being deployed only as a last resort. While diplomats said it remains possible that she might achieve that aim, they said other leaders were unlikely to accept her demand to make a specific treaty reference compelling private investors to participate in bailout costs.

Diplomats also said there was little enthusiasm for a British proposal for a specific clause to forbid the deployment again of the treaty article under which the European Commission makes €60 billion available to the temporary bailout scheme.

The IMF and the European Central Bank (ECB) have been calling on leaders to enlarge the €440 billion European Financial Stability Facility (EFSF) to show the force of their determination to defend weakened euro members. Expanding the EFSF’s remit to allow it buy sovereign bonds is also under discussion.

But Dr Merkel and French president Nicolas Sarkozy have resisted pressure to step up the response to the crisis, arguing that only a tiny portion of the fund has been used in the rescue of Ireland.

One diplomat said it was widely accepted that it would be very difficult for the chancellor to ask the German parliament to enlarge the fund in the absence of an immediate crisis, but another said the danger remained that leaders could be overtaken by events.

In separate development yesterday, the European Parliament voted to approve a 2.9 per cent increase in the EU’s 2011 budget to €126.5 billion after MEPs initially sought a 5.9 per cent rise. MEPs also backed regulations to introduce a “citizens’ initiative” scheme under which the European Commission is obliged to examine a legislative proposal if asked to by one million people.