Germany, France push reforms to tackle crisis

BRUSSELS (AP): France and Germany pushed other Eurozone countries to sign up for tough measures to limit debt loads, make their economies more productive, and stamp out the government debt crisis that has crippled their currency union over the past year.

In a joint news conference last Friday with French President Nicolas Sarkozy, German Chancellor Angela Merkel said governments should decide soon - by the end of March - on a so-called "pact for competitiveness" bringing the 17 countries that use the euro closer together in the way they run their economies.

German and French officials indicate the pact could include calls for putting debt limits in national constitutions, raising retirement ages to match increased life expectancy, and getting rid of salary increases tied to inflation.

They also want countries to set up orderly ways to handle bank failures and agree on a common base for figuring corporate taxation.

The debt crisis that has pushed Greece and Ireland to take international bailout loans has underlined a key vulnerability of the euro: one currency with one central bank, but 17 governments. There is little way to keep individual countries from undermining the shared currency with overspending, banking disasters, or growth-choking policies.

The two leaders presented their proposal to their Eurozone counterparts over lunch on Friday as part of a broader discussion over plans to overhaul the region's €440 billion (US$600 billion) bailout fund to make it more effective in stemming the crisis.

Within a year, Eurozone states should demonstrate the brink of bankruptcy in return for painful budget cuts and economic restructuring.

Many analysts have warned that those cuts make it almost impossible for already struggling economies to start growing again. The European Central Bank has also supported a wider role for the EFSF, all too happy to abandon its government bond-buying programme and focus on keeping inflation in check.

suggestions

Among the suggestions: letting the facility buy the bonds of vulnerable governments on the open market, thus stabilising their price and borrowing costs; providing countries with a short-term liquidity line when one-off measures like expensive bank recapitalisations threaten to sink their finances (as with bailed out Ireland), or even lending them the money to buy back their own bonds.

Right now, bonds issued by cash-strapped states like Greece, Ireland, or Portugal are trading at a discount due to doubts over the governments' ability to pay them back - theoretically making a buyback an easy way of cutting a country's overall debt.

To do that, the EFSF would likely need more money and the Commission has asked states to lift the fund's effective lending capacity to the €440 billion initially advertised. At the moment, it can only lend about €250 billion due to various buffers required to make the EFSF's bonds attractive to investors.

On top of that, there is a push to cut the interest rates already bailed-out Greece and Ireland have to pay for their rescue loans. New bank stress tests, to be published this summer, are meant to clear up holes in the European banking system that previous rounds of tests failed to reveal.

- AP