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European Union

EU leaders speed up ESM launch, endorse fiscal pact

EU leaders have approved the early debut of their permanent rescue fund, the ESM, and 25 states approved an agreement that cedes budget control over to Brussels. The UK and the Czech Republic have withheld their support.

EU summit banner

The summit comes as growth forecasts are being cut

Twenty-five of the European Union's 27 member states agreed to a fiscal unification pact that would cede much control of national budgets over to Brussels, after an afternoon summit in the de facto EU capital.

The United Kingdom had already declined to take part in the so-called "fiscal compact," which, among other things, would require countries to introduce balanced budget rules into their laws or constitutions. The Czech Republic also said it would not sign the agreement.

The leaders also approved the early introduction of the 500-billion-euro ($656 billion) European Stability Mechanism (ESM). The fund is now set for activation on July 1, one year before its original planned debut. It is to run parallel to its temporary predecessor, the European Financial Stability Facility (EFSF) for one year.

Existing rules limit the combined lending power of the two funds to 500 billion euros, but some officials have suggested the limit should be waived to combine the funds into a 750-billion-euro safety net.

Nicolas Sarkozy, Angela Merkel and Mario Monti arrive at summit

Merkel (center) backed off a suggestion that the EU should control Greece's budget

The leaders also approved a statement that foresees the EU redirecting some funds to fight unemployment and encourage growth.

"Wherever possible, efforts made at the national level will be supported by EU action, including better targeting available EU funds towards jobs and growth, within agreed ceilings," a seven-page summit declaration said.

Transatlantic free trade

Also among the issues touched on in the summit statement was the long-stalled idea of a free trade agreement between the EU and the United States.

"2012 should be a decisive year to move ahead on trade agreements with major partners," the statement said. Experts "should consider all options for boosting EU-US trade and investment."

There are a number of outstanding trade issues between the two economies, some of which have ended up in litigation before the World Trade Organization.

German Chancellor Angela Merkel and British Prime Minister David Cameron both suggested the idea should be revisited during speeches at the World Economic Forum in Davos, Switzerland last week.

India has also been in free trade discussions with the EU since June 2007, and Singapore began similar talks in 2010.

Austerity vs. stimulus

The summit comes at a time when leaders are shifting the rhetoric surrounding the eurozone crisis from austerity to fostering economic growth.

While several governments have tried to bolster investor confidence by passing multiple rounds of budget cuts and tax increases, the austerity has also triggered protests, strikes and government collapses. Unemployment remains stubbornly high, and economic growth forecasts for 2012 have almost universally been cut.

A plan to divert money from EU funding pools like the regional and structural development fund is seen by some as a viable alternative to national stimulus packages, which would have the effect of driving up sovereign debt for individual member states.

The Greek parliament

Greece responded with an emphatic "no" to the idea of losing financial sovereignty

The European Commission said before the summit that up to 82 billion euros could be available for reallocation.

Greek deal by week's end

The summit got off to a rocky start over a suggestion by German officials that an EU bureaucrat should have substantial control over the budget of Greece. The outcry in Athens led German Chancellor Angela Merkel to back off the idea at the start of the summit.

But European leaders on Monday called for a debt-restructuring deal for Greece with private creditors by the end of the week.

"We urge finance ministers to take all necessary actions to implement the private sector involvement agreement and to adopt the new program by the end of the week," EU President Herman Van Rompuy said.

´The deal is needed before agreement can be reached on a second bailout package. To avoid a default, Athens needs to meet a 14.5-billion-euro repayment deadline in mid-March.

Authors: Richard Connor, Andrew Bowen, Nicole Goebel (AFP, AP, Reuters, dpa)
Editor: Andreas Illmer

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