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Recap of European Council Summit

March 14, 2011

This past Friday, EU heads of state gathered for meetings. In the afternoon, the full European Council met for an emergency session to discuss the crisis in Libya. The formal declaration regarding Libya contained few surprises. French president Nicolas Sarkozy called for beleaguered to Libyan president Muammar Gaddafi to leave, a demand echoed in similar statements by European Council president Herman Van Rompuy and European Commission president Jose Manuel Barroso. Van Rompuy ruled out military intervention, however. The main point of divisiveness regarding Libya revolved around how to deal with the rebel-led administration in Benghazi. France has officially recognized the Libyan National Council as the official government and promised to send an ambassador to Benghazi. This move has drawn some criticism, however, and the official European Council declaration refers to the rebel government as “a political interlocutor.” Sarkozy has joined with British PM David Cameron in urging a more robust response to the Libyan crisis, as both have been vocal advocates of a no-fly zone. For now, however, their approach seems to have garnered little support within the EU.

The more eagerly anticipated event occurred Friday evening, as leaders of the 17 eurozone countries met to discuss proposals to strengthen the monetary union. Some of these policy proposals were discussed on this blog a couple of weeks ago in relation to how they affect Ireland. To summarize, EU leaders recognize the necessity of strengthening the European Financial Stability Facility (EFSF). This bailout fund was created in 2010 in order to respond to Greek-style financial crises. To respond to future crises, EU leaders want to bolster the fund’s lending capacity and make it permanent. However, France and Germany, as the two largest contributors to the fund, demanded a set of policy concessions in exchange for their support.

These policy concessions were made known in a Franco-German document distributed in February that became knows as the “competitiveness pact.” It called for eurozone countries to implement a set of economic policies, including raising retirement ages, limiting public borrowing, raising corporate tax rates, etc. This proposal met with immediate opposition, mainly among smaller countries who resented French and German domination. The European Commission worked out a revised draft of the competitiveness pact that had more widespread support.

It was this revised proposal that eurozone leaders discussed on Friday, and they agreed to the basic outline. As The Financial Times explains, “The deal, promoted by Germany and France, would require all signatories to introduce national legislation to limit public borrowing, monitor unit labour costs to keep wage rises in line with productivity, and raise retirement ages to contain the cost of their pension systems.” In exchange, leaders agreed to increase the lending capacity of the EFSF and make it permanent beyond its current expiration date of 2013. In addition, the fund will be able to buy bonds directly from economically struggling countries, although some had urged that the EU go further and allow the fund to buy bonds on the open market (see Alphaville’s blog post at The Financial Times for a critique of the bond-buying provision).

Some of the main drama was provided by newly elected Irish leader Enda Kenny, who rode to victory while promising to renegotiate the terms of Ireland’s bailout package. Most notably, Ireland wants a reduction on the 6% interest that it currently must pay on EU loans. Greece, which was bailed out by the EU last year, was actually successful over the weekend in favorably renegotiating the terns of its loan. Greek leaders agreed to raise revenue by privatizing state assets. Ireland met with less success, mainly because Mr. Kenny has adamantly refused to consider raising the country’s corporate tax rate, the main demand being made of Ireland by France and Germany. Apart from France and Germany, however, some other countries, as well as European Commission head Barroso, have expressed more willingness to ease Ireland’s repayment conditions.

The details of the agreement are likely to be worked out by finance ministers meeting this week and formally endorsed when the European Council next meets at the end of March.

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