EU fault on debt contagion runs deeper

BRUSSELS: European Union divisions widened over how to contain the debt contagion that threatens the euro, limiting a summit starting on Thursday to agreeing on a crisis-management mechanism that will take effect in 2013.

German Chancellor Angela Merkel balked to boost or make more flexible, the use of the EU’s € 750 billion ($1 trillion) emergency fund, as leaders neared an accord on the tool to contain future debt shocks.

Strife among Merkel, the European Central Bank, Luxembourg Prime Minister Jean-Claude Juncker and the German domestic opposition intensified on the eve of the Brussels summit, marring confidence in Europe’s handling of the fiscal woes that forced Greece and Ireland to fall back on financial handouts.

 “There is a situation of European gridlock again with Germany blocking actions to make progress ,” said Nick Kounis, chief euroregion economist at ABN Amro, Amsterdam and a former UK Treasury official. “There is a high risk of the crisis re-escalating and maybe now it’s the quiet before the storm in markets.”

Portuguese, Greek and Spanish bonds slipped on Thursday. The extra yield that investors demand to hold Spanish 10-year bonds over German counterparts rose four basis points to 246, one day after Moody’s Investors Service warned about a possible credit downgrade. A Spanish bond auction raised € 2.4 billion, less than the maximum target . The euro rose 0.2% to $1.32.

EU governments are close to agreeing on a two-sentence amendment to the bloc’s Lisbon Treaty foreseeing a “mechanism to safeguard the stability of the euro area as a whole” with financial aid for distressed governments “subject to strict conditionality,” EU officials told reporters in Brussels on Wednesday.

Germany has failed to get a reference to possible costs for bondholders enshrined in the treaty and is virtually alone in pushing for the amendment to say that any financial assistance will only be offered as a “last resort” .

Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution , binding on EU institutions in Brussels and on national governments’ handling of European affairs . All 27 countries, including the 11 outside the euro region, would need to ratify the amendment.

German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in an € 85-billion support package for Ireland on November 28.

Merkel on Wednesday laid out a nine-point set of demands that don’t need to be embedded in the treaty, which won backing from euro finance ministers last month. In a retreat for Germany, the plan foresees only “case by case” write downs for bondholders in accord with International Monetary Fund practices.

 “For me it’s important that financial aid will, also in the future, be granted only as a last resort,” Merkel told parliament in Berlin on Wednesday. “We will gain more stability , and this gives us more security for the future. The euro is our common fate and Europe is our common future.”

The summit starts at 5 pm Brussels time with EU President Herman Van Rompuy likely to announce interim results late evening. The gathering is slated to end around 1 pm on Friday. Away from the constitutional debate, Portuguese FM Fernando Teixeira dos Santos said IMF experts are in Lisbon on a routine inspection trip.

Germany, France to form new plan to help eurozone

BRUSSELS: EU leaders have agreed to work for closer economic cooperation amid worries about high debts in countries that use the struggling euro.

French President Nicolas Sarkozy says he and German Chancellor Angela Merkel will present new proposals to reduce differences among the economies that use the euro.

Sarkozy says ``we have to tackle the competitiveness gaps within the 16 eurozone nations.’’

Belgian Prime Minister Yves Leterme says, ``Monetary union requires an economic union, nobody can avoid this destiny.’’

Both spoke after a summit of the leaders of the 27 EU nations ended on Friday.