EU nerve centre resumes task of taming flailing members' debt


EUROPEAN DIARY:Just as Ireland gets used to the bitter taste of bailout medicine, Portugal and Spain get to the top of the queue

BRUSSELS WAS like a ghost town after the holiday, the streets eerily quiet by daytime as officials and diplomats drift back to work. As business resumes in earnest this week, however, a new phase begins in the battle against the euro debt siege.

Prickly questions must be tackled, among them the vexed issue of how private investors can be compelled to bear sovereign bailout costs whenever governments take external aid. Moves in this direction put the frighteners on markets last autumn but EU leaders have resolved to spell out by March how exactly they will achieve that. In the prevailing hothouse atmosphere, that’s a rather tight deadline.

More immediately, however, Portugal’s capacity to survive the storm hangs in the balance. With key bond auctions looming tomorrow as the country comes under renewed market pressure, the country’s borrowing costs are already deemed in many European capitals to be unsustainable.

Whereas prime minister José Sócrates habitually declares resolve to put his public finances right, there is concern in Brussels that his confident talk is not matched with necessary zeal in the action department. This makes a fragile situation only worse. Already there are reports of pressure on Sócrates from Germany and France to take aid now. Such reports are strongly denied, but the mood music carries fateful echoes of the bleak tune that accompanied Ireland’s slide into the abyss.

Any early reprieve for Portugal is out of the question. The country is borrowing more than €20 billion this year, a mountainous task.

The problem for European leaders is that euro-zone weakness does not end with Portugal. Far from it. Ailing Spain returns to the bond market the day after Portugal, a fresh test of investor confidence in the Zapatero administration. That the debate has seen Spain characterised, almost simultaneously, as “too big to save” and “too big to fail” vividly illustrates the confusion wrought by the turmoil. Whatever about Portugal, any deployment of aid for Madrid would stretch the bailout fund to its limits.

To add to the tension, concern is intensifying over Belgium’s failure to form a government after six months of fruitless talks. Even Italy is deemed to be in the firing line. Contrast that with the scene a year ago when the problem was seen to be one that started and ended with Greece. If only.

These are the points of attack against the single currency. In terms of the defence, the EU authorities will take fresh steps tomorrow to deepen the co-ordination of their economic policies with the introduction of the inaugural “European semester”. This is the title of the new system under which member states must submit draft budget plans to Brussels for approval before they go the parliament, a vehicle for clamping down early on wayward policies.

The opening act in the semester is the publication of a European Commission growth survey in which it sets out policy recommendations to member states. From an Irish perspective, the paper is unlikely to prescribe anything not already embraced in the bailout deal a few weeks ago. This alone is a measure of how much things have changed since the intervention. When the semester was first mooted last May, there was uproar on the Opposition benches in Dublin over the seepage of “sovereignty” to Brussels. We’re deep into that territory now – and will be for years to come.

The semester, however, is only part of the defence. Still to be resolved is the question of how the authorities penalise countries that breach budget rules.

Whereas Germany and France want to water down demands for automatic sanctions against errant governments, the European Central Bank and other member states continue to press for tougher measures. It will fall to Hungary’s presidency of the EU to bring the sides together, testing the standing of a government whose draconian new media laws have been criticised around Europe. Whether the controversy dims its bargaining power remains to be seen.

Either way, Europe continues to be beset by the debt drama. At the highest level, leaders face yet more tough decisions and pressure from their own rank and file.

For example, leading figures in the French UMP party want president Nicolas Sarkozy to throw aside his resistance to eurobonds. In Germany, however, chancellor Angela Merkel’s government allies in the Christian Social Union party warn anew against such a departure. “Neither the community nor the individual member states are liable for the liabilities of other members and their companies,” they say in a new report.

It goes on and on.