Europe

Germany talks tough on EU bail-out fund

German Europe Minister Werner Hoyer, 22 Nov 10
Image caption Mr Hoyer says Europe has seen a big shift in attitudes towards public debt

Germany has warned that the eurozone's future bail-out fund must not become a "regional development fund", despite Europe's widely diverging economies.

Next month the EU plans to finalise the rules for the new permanent fund - the European Stability Mechanism (ESM).

"We think it's not a regional development fund," Germany's Europe Minister Werner Hoyer said. "That would be close to a liability union."

The Greek and Irish debt crises have forced an EU rethink on bail-out rules.

France and Germany are calling for a harmonisation of economic policy across the 17-nation eurozone, to make monetary union work better.

But a "no bail-out" clause in the 1992 Maastricht Treaty bars countries that use the euro from taking on the debt liabilities of a fellow eurozone country in trouble.

That rule was undermined when the temporary 440bn-euro (£369bn; $595bn) European Financial Stability Facility (EFSF) was set up last year to rescue debt-laden Greece.

Avoiding legal challenges

EU leaders have agreed to amend the Lisbon Treaty - successor to Maastricht - to make any future eurozone bail-out legally watertight.

At the insistence of Germany the amendment attaches strict conditions to any financial assistance - meaning that a debt-laden country will have to take tough measures to put its house in order.

The EFSF runs until 2013, when the permanent fund - the ESM - is expected to supersede it.

The eurozone has agreed to put 500bn euros into the ESM. The International Monetary Fund will also probably contribute an additional 250bn euros. It has already put 250bn euros into the EFSF.

Last year's debt crisis in the eurozone led some German politicians and commentators to voice fears that affluent Germany could end up bailing out the weakest economies in the eurozone.

Eurobonds rejected

Greece and the Irish Republic ended up seeking massive eurozone loans last year because market confidence in their sovereign debt crumbled and their borrowing rates became unsustainable. Portugal has faced similar market pressures recently.

Mr Hoyer said that debt restructuring "of course is an option" in some cases. That would mean investors in a country's debt seeing some or all of that debt devalued - a so-called "haircut".

But any such move must be "on the basis of a resolve to keep the eurozone together", he told reporters in London. "If we allow salami tactics [in the eurozone] we're in deep trouble," he said.

He also dismissed the suggestion that "Eurobonds" could be an answer to the eurozone's debt problems.

Issuing such bonds - as an alternative to sovereign debt - would put an unacceptable burden on some countries to provide guarantees, he said.

"It's politically untenable and legally impossible," he added.

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