Late-night talks thrash out deal amid fears Greek crisis could threaten European project European leaders have reached an agreement to create a special fund to avert a full-scale euro crisis. Photograph: AP/Joerg Sarbach European governments early this morning approved a €500bn deal to save the euro after 11 hours of talks that took place against the prospect of the single currency drowning in a tidal wave of debt and default fears, and even a question mark over the whole European Union. EU finance ministers meeting in Brussels had quickly agreed a modest "stabilisation mechanism" worth €60bn for eurozone countries in trouble. But early this morning the Spanish finance minister Elena Salgado announced that the ministers had agreed to make a further €440bn available, a proposal suggested by Berlin and Paris, which would also involve the International Monetary Fund and come in return for pledges of swingeing spending cuts from countries needing support. The Franco-German euro rescue blueprint seen by the Guardian singled out Portugal and Spain by name as likely beneficiaries of the intervention scheme, but insisted that both countries would need to embark on fiscal retrenchment, attaining "budget consolidation" targets worth 1.5% of their economic output this year and 2% next year in order to qualify for bailouts. The desperate measures agreed in the early hours in the Belgian capital represent the most fundamental rewriting of the single currency regime since its inception 11 years ago, after months of hesitation over what to do about the debt crisis in Greece. However, as the governments engaged in a high-risk gamble to shore up the currency, it was unclear whether the moves would be enough to see off market pressure on the eurozone's weaker links. After a special summit of the 16 eurozone government leaders, which ended early on Saturday morning, the European commission and the 27 finance ministers of the EU member states quickly agreed on a so-called stabilization mechanism, invoking last-resort emergency clauses in the Lisbon treaty as the legal basis. Despite the political limbo in Britain, the chancellor, Alistair Darling, travelled to Brussels, anxious to forestall any attempt to manoeuvre the UK into footing part of the bill for shoring up the euro. But he agreed with the other 26 ministers to more than double a European commission-administered fund for balance of payments support from €50bn (£43bn) to €110bn. The extra €60bn will also be available to eurozone countries. In the worst-case scenario, Britain would still be liable for €15bn, according to the Treasury. Under previous rules, the commission has been allowed to raise €50bn, using the EU budget as collateral, to help distressed countries outside the single currency. In the past 18 months, Latvia, Hungary and Romania have drawn on it. A further, and perhaps the most far-reaching, plank in the rescue strategy concerned the European Central Bank (ECB). The bank is under pressure to assent to a programme of quantitative easing through a massive bond buyback operation on the secondary markets, and perhaps also by agreeing to accept downgraded bonds as collateral for lending, as it agreed to do for Greece last week. Senior ECB officials attended last night's Brussels meetings and the central bank is expected to make a statement today. The breakthrough on the €500bn bailout was preceded by intense lobbying from Washington, with Barack Obama talking last night to the German and French leaders, Angela Merkel and Nicolas Sarkozy. At German insistence, the €110bn rescue package for Greece decided last week is to be the template for the save-the-euro blueprint worth four times that figure. The German terms also mean the IMF will be strongly involved. Early this morning it was revealed that the IMF would contribute an additional sum of up to €220bn. Legally, the money would also come from the member states, under bilateral loan guarantees, rather than being an EU facility administered by Brussels. Several of the smaller EU member states were unhappy with the proposals last night, while Spain was said to be furious at being asked to pledge spending cuts. Salgado, said: "We are going to defend the euro. We have to give more stability to our currency." The bigger bailout fund would apply only to the 16 countries using the single currency, whose governments would be liable in the case of default. While Britain signed up for the €60bn mechanism, the more ambitious scheme was a red line for Darling. Treasury officials said that Britain would agree to the plan only if there were copper-bottomed pledges that there could be no fiscal implications for the British government. "What we will not do and what we can't do is to provide support for the euro," the chancellor said ahead of the meeting. "That has got to be for those countries that use the euro." Over the past week, Merkel, Sarkozy and Jean-Claude Juncker, the Luxembourg prime minister and head of the eurogroup, have declared war on the financial markets, deploying martial language to denounce the "speculators" engaged in a global campaign to destroy the euro. Anders Borg, Sweden's finance mionister said: "We are seeing wolfpack behaviour in the markets, and if we don't stop these packs, they will tear the weaker countries apart." The Europeans were also under pressure from the Americans and other world leaders to act decisively to stabilise the euro for fear that a meltdown in Europe will spread to economies globally. The IMF board met in Washington yesterday and approved its three-year €30bn support for Greece, as part of the €110bn bailout package. It was also said to be coordinating closely with the Europeans on this morning's decisions. This morning's moves looked like a last-ditch act that will either presage the consolidation of the euro or, if it fails, lead to meltdown and the unravelling of the single currency zone. What began last autumn as an incipient crisis in Greece – representing less than 3% of EU GDP – has snowballed into a full-scale euro crisis, which could bring down large parts of the banking sector and tip much of the west back into recession.
Monday, 10 May 2010
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