The annual World Economic Forum meeting in Davos has concluded with a clear signal that stronger measures must be taken to end Europe’s debt crisis. How far European officials are willing to go in response may be revealed at a Brussels summit on Monday, with leaders are set to finalise two new treaties.
But ahead of the summit, Greece has rejected German proposals for the EU to hold power over its budget. Meanwhile, French President Nicolas Sarkozy has announced domestic plans to create jobs and growth in the run-up to presidential elections in April.
Media reports say there was some cautious optimism by the end of the five-day World Economic Forum meeting in Davos, though the mood was still sombre overall. Discussion continued about a possible breakup of the euro zone, but few now expect this to happen soon.
Bankers believe many people are still underestimating what a game-changer the European Central Bank's offer of unlimited three-year loans to banks has been. The policy is part quantitative easing, part proto-euro bond and part backdoor. By removing the prospect of a systemic bank crisis, the ECB has bought the euro economies some time.
Report: Davos Banks on Euro-Zone Survival [Wall Street Journal, 29 Jan 2012]
But Bank of Canada Governor Mark Carney told Bloomberg Television that Europe’s woes will subtract 1 percentage point from global growth by the end of 2012 “and that’s in a world where this crisis is contained".
“It’s not just a euro-zone crisis, it’s a crisis that could have spillover effects around the world,” International Monetary Fund Managing Director Christine Lagarde said. She came to Davos promoting her push for $500 billion in new crisis- fighting money for the IMF.
Report: Davos Tells EU to Fix Crisis for Good After Two Years of Failure [Bloomberg, 29 Jan 2012]
European Union leaders are meeting at a summit on Monday, but unresolved problems in Greece are casting a shadow on the discussions. That said, there is no formal mention of Greece on the agenda or in the statements drafted for the meeting.
Instead the leaders of the 27 governments will discuss how to underpin an EU recovery with "smart growth" policies, which would entail medium-term structural reforms, cutting labour costs, reshaping labour markets and redirecting surplus EU budget funds towards the eurozone periphery, where the debt crisis is hitting hardest.
Leaders are also to finalise two new treaties directly dealing with the euro crisis.
The first is the German-led "fiscal compact" which will enforce debt and deficit ceilings across the eurozone. Brussels will have greater powers to ensure compliance and penalise offenders, and making the fines imposed on delinquents more automatic and less open to political abuse.
The second treaty sets up the eurozone's new permanent bailout fund, the European stability mechanism (ESM), which is to come into operation a year earlier than planned in July with a kitty of €500bn (£420bn).
The two treaties are explicitly linked, at Berlin's insistence. A country in need will not be able to tap the bailout fund unless it has signed up to the other treaty and the stiff new fiscal and budgetary rules. At a previous EU meeting, British Prime Minister David Cameron refused to sign the fiscal compact.
Report: EU summit on debt crisis faces Brussels disruption as unions strike [The Guardian, 29 Jan 2012]
Greek Troubles Continue
But while EU leaders are managing to put together pieces of legislation and financial barriers that might help them stave off a repeat of the debt crisis, immediate concerns - especially over Greece and potentially Portugal - remain.
By far the most pressing worry is the seven-month-long negotiation over private sector involvement in the second Greek rescue package. Talks are currently underway in Athens, but even if Athens can strike a deal with private bondholders to accept a 50 percent writedown on the nominal value of their bonds, it may still not be enough to close Greece's funding gap.
The IMF has suggested it may be necessary for public sector holders of Greek bonds - including the ECB and national central banks in the euro zone - to write off some of their holdings in order to close the gap.
Report: EU leaders to agree on permanent bailout fund, balanced budget [Reuters, 29 Jan 2012]
Greeks Reject EU Control of Budget
Meanwhile, Greek officials have angrily rejected a German plan for the eurozone to impose a budget overseer onto Athens in return for a new €130 billion (US$172 billion) bail-out.
Greece's Finance Minister Evangelos Venizelos said the proposal to create a European Union "budget commissioner" with the power to veto Greek tax and spending decisions would force his country to choose between "financial assistance" and "national dignity".
The German proposal, which was leaked on Friday, would also force Greece to pay its debt obligations before spending any money on normal government expenditures. The plan caught Greece and other eurozone governments by surprise.
Report: Greek fury at plan for EU budget control [CNN (Financial Times), 30 Jan 2012]
"It's going to be impossible for the Greek government to accept such a deal - I don't think it would be supported by any of the heads of the parties that are involved in the coalition," said Greece's Culture Minister Pavlos Yeroulanos.
"We have been giving up quite a bit, but I think sovereignty is a red line that no-one would dare cross.
According to the BBC, the new German proposal reflects widespread concerns that Greece is not succeeding in bringing its budget into order. Reforms have been slow and the budget deficit remains above target.
In reality, Greece's finances are already to a large extent controlled by foreign forces. Greece has received enormous bailouts from the EU and IMF conditional on deep cuts and fiscal reforms drawn up by officials in Brussels.
But ceding more control to Brussels would be deeply unpopular. Most Greeks are against the austerity programme demanded by the EU and IMF, with much anger focusing specifically on Germany.
Report and Analysis: Greeks reject 'impossible' German plan for budget veto [BBC, 29 Jan 2012]
Sarkozy Announces Economic Measures Ahead of Elections
Over in France, President Nicolas Sarkozy has announced plans to introduce a tax on financial transactions.
"We hope the tax will generate one billion euros ($1.3bn, £0.8bn) of new income and thus cut our budget deficit," he said on French television.
The 0.1 percent levy will be introduced in August regardless of whether other European countries follow suit. Mr Sarkozy hopes the tax will push other countries to take action.
The tax is part of a package of measures set out by the president to promote growth and create jobs. Among the other measures announced by Mr Sarkozy is an increase in sales tax of 1.6 percent which will be used to fund a reduction in the charges paid to the government by employers. The intention is to create employment and discourage industry from moving abroad. Labour laws will also be freed up to allow companies and trades unions to negotiate on pay and conditions at a local level.
Mr Sarkozy is reportedly hoping to rush the measure through parliament before the French presidential elections, less than three months away. Mr Sarkozy is currently trailing in the opinion polls behind his Socialist rival Francois Hollande.
On Saturday, Germany's governing Christian Democratic Union (CDU) said German Chancellor Angela Merkel would appear at French election rallies to give her backing to Mr Sarkozy's campaign.
Report: Sarkozy announces French financial transaction tax [BBC, 30 Jan 2012]