A German government source said there were positive signals
that Greece and Ireland, which received EU/IMF bailouts last year, might also
announce new moves at the summit, opening the way for EU paymaster Germany to
offer them more help.
Chancellor Angela Merkel was ready to support some easing of
the terms on their bailout loans if Athens speeded up promised privatizations
and Dublin was more forthcoming on a common corporate tax base in the euro
zone, the source said.
But new Irish Prime Minister Enda Kenny said Dublin would
resist German efforts to introduce a common corporate tax base.
“This would be a harmonization of tax by the back door,” he
said in comments broadcast by RTE state radio.
Greece said that weaker than expected revenues and higher
spending had widened its state budget shortfall in the first two months of
2011, blowing it off course in its efforts to meet the tough fiscal targets set
out by the EU and IMF.
Moody’s slashed Athens’ credit rating by three notches on
Monday citing a heightened risk of default.
The euro, which suffered its biggest one-day fall against
the dollar in a month on Thursday, languished near a one-week low and
Portuguese bond yields rose despite the budget measures amid growing market
doubts that leaders can bridge differences on how to solve the region’s fiscal
woes.
The slow pace of European crisis management has piled
pressure on Portugal to seek an EU/IMF bailout. Prime Minister Jose Socrates
has resisted, saying it would be a national humiliation.
In a last-ditch attempt to convince investors its finances
are sustainable, his government announced new cuts worth 0.8 percent of gross
domestic product this year and structural reforms that it said would push its
deficit down faster.
The measures include cuts in spending on social welfare and
infrastructure.
Changes to labor market rules are also planned, including a
reduction in layoff payments.
European Monetary Affairs Commissioner Olli Rehn welcomed
the “clear and important” Portuguese steps, which he said would help Lisbon
regain control over its debt and end uncertainties.
“This is Portugal still desperately trying to prove that it
has the political will to push through these painful measures,” said Colin
Ellis, chief economist at BVCA in London.
“Ultimately, however, the interest rates they are paying in
the market are unsustainable. There’s still a good chance they will need some
support at some stage.”
Austrian Finance Minister Josef Proell, in an interview with
the Financial Times, urged Portugal to learn from the lessons of Greece and
Ireland, saying “Don’t be too late. Make your decision soon: yes or no.”
Germany doused market expectations of a breakthrough on the
rescue fund at Friday’s summit of the 17-nation currency area, saying the most
that should be expected is an agreement on a “competitiveness pact” it put
forward with France last month.
Bigger decisions to tackle the crisis — such as whether and
how to strengthen the euro zone’s bailout fund — will be handled at a later
summit on March 24-25.
Berlin’s aim on Friday was to get euro zone states to
enshrine EU curbs on deficits and debt in national law — effectively making it
illegal for any euro zone member to exceed fixed deficit and debt limits in the
future.
The EU’s Stability and Growth Pact sets a government deficit
limit of 3 percent of GDP and debt of 60 percent of GDP. Translating that into
national laws would entail the adoption of a “debt brake,” similar to what
German law requires.
“Euro area member states commit to translating EU fiscal
rules as set out in the Stability and Growth Pact into national legislation,”
the latest draft of the agreement reads.
“Member states will retain the choice of the specific
national legal vehicle to be used, but will make sure that it has a
sufficiently strong binding and durable nature (e.g. constitution or framework
law),” the draft said.
If Germany and France can get the remaining euro zone
members to sign up to the competitiveness pact — which also includes moves to
gradually raise retirement ages and work toward a common corporate tax base —
there is an expectation that Germany will agree to back a stronger bailout
fund.
The European Financial Stability Facility, used to rescue
Ireland, has an effective lending capacity of 250 billion euros ($345 billion),
not its full 440 billion, because of guarantees needed to retain its triple-A
credit rating.
Merkel told lawmakers in her party on Thursday that Germany
would only increase its guarantees if non-triple A states put in more capital,
according to participants at the closed-door meeting, something several of
those states have opposed.
The debate will be taken up on March 24, but its outcome may
depend on how much backing Germany wins for Friday’s agenda.
Analysts see the competitiveness pact as a sideshow, saying
it does nothing to tackle the fundamental problem of bad banking debts and
highly indebted sovereigns with poor growth prospects.
