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EU Economy Summit Overshadowed By 'Greek Tragedy'


Olli Rehn, the EU's finance and monetary commissioner, gives the annual assessment of the stability and convergence programs in Brussels on March 24.
BRUSSELS -- The EU has spent nearly two months now trying to grapple with what has become known as the "Greek tragedy" -- Greece's teetering on the brink of state bankruptcy as a result of profligate boom-time spending.

Late this afternoon at the EU summit in Brussels, there was a breakthrough. The leaders of France and Germany agreed on a joint plan to intervene, if necessary, to help Greece out of its crisis.

A French official said President Nicolas Sarkozy and German Chancellor Angela Merkel had agreed during private talks in Brussels on "a text...which describes very precisely the conditions on which eurozone countries could be called upon to intervene."

Under the arrangement, eurozone countries would provide the majority of any funding for Greece, with rigorous conditions set by the European Commission and the ECB, and the International Monetary Fund would contribute money and expertise.

The French official said the mechanism would be triggered "only if there were very serious difficulties and there was no other solution."

A rare meeting of eurozone leaders was set for later tonight so leaders could discuss the agreement.

In a speech before the German parliament before she left for Brussels, Merkel emphasized the gravity of the Greek problem for the whole of Europe. "If any member country of the eurozone became insolvent then it would mean serious risks for everyone in Europe, including Germany as Europe's largest economy," Merkel said.

Greece's public debt is estimated at some 300 billion euros ($400 billion) -- almost 120 percent of gross domestic product -- and it will need to find 20 billion euros within a month to refinance it. Athens' credibility on the international money markets, however, has taken a severe beating. Meanwhile, its empty coffers and attempts at cutting back public spending have led to protests that threaten political instability.

But the main fear of EU -- and, above all, eurozone -- leaders is that other spendthrift governments could face similar problems. Apart from Greece, the group comprises Italy, Portugal, and Spain. This could put in jeopardy the future of the euro currency union as such.

Adding to the concerns was the news on March 24 of a debt downgrade for Portugal, along with comments by a senior Chinese central-bank official today that the Greek debt crisis was just the "tip of the iceberg."

Worries over Greece -- and the EU's response -- have helped drag the euro to its lowest level in 10 months against the U.S. dollar.

Unity vs. Stability

The crisis has also exposed deep divisions within the EU, with the bloc's richest member, Germany, unwilling to come to Greece's rescue. Berlin is held back by repeated rulings of its Constitutional Court that it is illegal to spend public money to help other eurozone governments.

These rulings reflect a deep historical attachment to economic stability, stemming from a conviction that it was the upheavals of the 1920s that paved the way for Hitler to come to power.

Also, today's German public, proud of their own country's economic strength, is overwhelmingly opposed to a rescue bid. Some surveys suggest some 85 percent are critical of the idea. Chancellor Merkel also has her eye on the upcoming local elections in May.

Leaders are divided over how to help Greece, with Germany pressing for involvement of the International Monetary Fund (IMF). In her speech to the German parliament today, Merkel made clear that in Germany's view, the IMF must be involved, but "only as a last resort."

IMF help would be unprecedented for a member of the eurozone -- and would cause inevitable loss of face for the EU. This is not a popular thought in Paris and other continental capitals, which see the euro as a harbinger of a political union. France especially has been putting pressure on Germany to ease budgetary rigor, help Greece, and encourage more spending to help revive other embattled southern economies.

Merkel strongly rejected the recent French assertions that Germany's export-driven recovery is taking place at the expense of other EU members. The line of thinking here is that Germany should stimulate domestic spending, to provide a bigger market for goods from the rest of the EU.

"It is absurd that Germany's strongly competitive economy has been made out to be the scapegoat for the developments which we are now having to deal with," Merkel said, and described Germany as being already "Europe's biggest importer."

Finding The Way Forward

The "Greek tragedy" is likely to throw a pall over the rest of the summit, originally intended to focus on the EU's next 10-year plan, called "Growth and Jobs."

Herman Van Rompuy, the president of the European Council, wrote in a letter to EU leaders on March 23 that strategic benchmarks should be agreed by the end of June. The EU's last 10-year plan, known as the "Lisbon Agenda," ended in ignominious failure after none of the main goals -- above all various growth and employment targets and research and development funding levels -- were met.

Trying to steer a careful course in the present crisis, Van Rompuy suggests in his letter that the EU could extend its current oversight of certain aspects of budgetary policy to competitiveness.

This is something that is likely to please Germany, which argues that other EU countries must emulate its example by saving and increasing productivity to better compete with the outside world.

Many critics have pointed out, however, that such a policy, if it succeeded at the EU level, could spell the end of global free trade. The United States, Japan, and other advanced economies would be certain to take countermeasures to ensure cheaper EU exports did not swamp their own markets.

The other original headline topic for the summit, listed by Van Rompuy, is climate change. The EU is keen to get negotiations back on track on a global, legally binding agreement with enforceable reduction targets for emissions -- something it failed to do at the Copenhagen summit in December 2009.

No foreign-policy issues are listed on the formal summit agenda. Since the Lisbon Treaty came into force on December 1 last year, EU foreign ministers no longer attend summits. They will be represented by the new high representative for foreign policy, Catherine Ashton, as needed.