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Text by News Wires

Latest update : 2010-03-08

The European Commission is expected to float proposals on Tuesday to create a European monetary fund that could rescue debt-hit countries by providing loans on strict conditions that states cut their deficit levels.

AFP - Europe moved on Monday toward the creation of a rescue fund of its own, designed to shore up the euro currency should wayward users become trapped by spiralling debts like Greece.

But German-driven plans for a kind of EU monetary fund immediately ran into obstacles as the European Central Bank's top economist warned they would create the "wrong incentives" and France countered that any fund could take "years" to set up.

European Union countries are already divided on how far to push for French President Nicolas Sarkozy's stated desire of pan-continental "economic government."

Politically, the left also wants to ensure that greater emphasis is placed on investment via such a fund to create jobs and growth.

Economic analysts themselves warned the plans could trigger renewed "recession."

The EU executive commission said on Monday it would float proposals within 24 hours to create a "European" version of the Washington-based International Monetary Fund.

Paradoxically, the EU can only currently give such emergency loans to non-euro members, as seen last year with Hungary, Latvia and Romania.

Economic and Monetary Affairs Commissioner Olli Rehn will "inform" his peers in the European Commission on Tuesday of ongoing "discussions" on the issue, said his spokesman Amadeu Altafaj Tardio.

He gave no details on how the fund would be built up or run.

The plans, aimed at preventing future crises, are being developed in response to crippling debts run up in Athens, themselves masked by dodgy data reporting down the years.

These have forced radical austerity measures on Greece's Socialist government and triggered strikes and violent protests in Athens.

Greece is not alone in its troubles. The Portuguese government said on Monday that it would cut spending, delay investment and sell state assets to fix Lisbon's finances.

Rehn earlier told the Financial Times Deutschland newspaper that financial aid, whether through loans or other guarantees, would be linked to "strict conditions," in other words, budget cuts or structural economic reforms.

The commission would not comment on German press reports saying Berlin wanted concrete powers to apply "sanctions" written into new arrangements.

According to the FT, these could include the loss of standard EU funding, the temporary removal of EU voting rights and even provisional exclusion from the eurozone.

At the currency's birth a decade ago, Germany rejected the idea of including such safety nets for fear of encouraging profligate spending.

As Europe's biggest economy with the most to lose should euro confidence again slide, but with a government that is reluctant to upset taxpaying national voters, Berlin is leading moves to strengthen a common toolkit for euro countries.

German Finance Minister Wolfgang Schaeuble is on record as saying that "for the internal stability of the eurozone, we need an institution that has the experience and power of the IMF."

Schaeuble's spokesman Michael Offer stressed on Monday that Berlin was working with France on proposals to be unveiled "shortly."

However, the ECB's Juergen Stark told the financial daily Handelsblatt that the scheme "could be very expensive, create the wrong incentives and finally, burden countries (that have) more solid public finances."

A French government official added that Germany's proposal is "very, very complex" and would "require a modification of the treaties."

Standard & Poor's analyst Trevor Cullinan said such a fund could provide "breathing space" but stressed that the "ultimate responsibility for correcting imbalances" would "remain with the sovereign state."

Natixis economist Patrick Artus further warned that an "intensification of speculative attacks" by traders on bond and currency markets could unleash a vicious circle resulting in "recession in the eurozone and depreciation of the euro."

According to his spokesman, the head of the European Socialist grouping, Poul Nyrup Rasmussen, said the plans are "too focused on the monetary side, rather than looking at the best way we can promote growth and jobs."

Date created : 2010-03-08


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