Details cloudy as summit to focus on convergence

ANALYSIS:PREPARATIONS FOR a key EU summit tomorrow are shrouded in uncertainty as officials try to gauge Berlin's bottom line for fundamental reforms to the euro bailout scheme.

Angela Merkel, Germany’s powerful chancellor, wants deeper European economic convergence in return for such reforms and she has urged French president Nicolas Sarkozy to follow her down that path.

The fine grain of her proposal remains conjecture, although it is known to include a common pension age and tight new rules on budget deficits and debt. But the details are cloudy. One top-level EU source said certain decision-makers were readying themselves for the summit on the basis of reports in German and American newspapers.

It is known, however, Merkel wants her nascent “competitiveness pact” to operate as an intergovernmental arrangement outside the framework of EU law. This raises questions of political legitimacy, for participating governments would have to shed the protection of the European treaties.

Brussels is displeased. European Commission chief José Manuel Barroso told MEPs last evening that Merkel’s plan raises important, politically sensitive questions. “We have to do it in a way that is coherent and compatible with the treaties and with the community approach.”

It is clear Merkel’s hard line on the interest rate that should apply to bailout loans presents a big challenge for Fine Gael leader Enda Kenny, the man most likely to succeed Brian Cowen as Taoiseach.

The interest rate discussion – and talk of discounted bond buybacks by ailing euro countries – is bound up with a wider package of reforms of the euro zone rescue fund. Also in the mix is a proposal for a permanent bailout fund in which sovereign bond investors would have to bear bailout costs in rescue situations.

Final decisions are not likely tomorrow but EU leaders want to set out a framework for further talks on a comprehensive “big bang” package to finally resolve the sovereign debt crisis. While designing the existing bailout scheme was an affair for finance ministers, diplomats believe Ms Merkel wants to maintain the next phase of the talks at the level of heads of state and government.

If they are to move forward in this way, the leaders of the 17 single currency countries may be asked to take part in an extraordinary euro-zone summit next month. Soon after the Irish election, it would set the stage for a push to achieve a formal deal at the next scheduled summit after that, on March 24th and 25th.

That Germany is already specifically linking lower loan costs to deeper economic co-ordination could be very ominous for Ireland. After all, both Merkel and Sarkozy see harmonised corporation tax as a key element of European economic convergence.

Whatever the force of any new Franco-German alliance on this front, Irish resistance is inevitable. Ireland habitually relies on the argument that tax harmonisation lies beyond the EU’s ambit. But Merkel’s push for an intergovernmental scheme stands as a potent new threat. EU treaties on tax wouldn’t really count in such a scenario.

Although it would of course be open to Dublin to shun an arrangement like that, Merkel carries all the cards.