February 4, 2011

EU Considers Stronger Bailout Fund; ECB Doesn’t Raise Rates

France, Germany may broker deal on commitments in exchange for fund increase

European Union (EU) leaders on Friday will discuss strengthening the European Financial Stability Facility (EFSF). France and Germany are also expected to present attendees with joint proposals to impose financial commitments within euro zone nations in exchange for Germany’s support on the matter.

The meeting follows a Thursday announcement by Jean-Claude Trichet, president of the European Central Bank (ECB), that euro zone interest rates would not increase; the news had sent the euro tumbling.

According to Reuters, investors had expected, after the ECB’s previously tough talk on inflation worries, that it would act sooner rather than later to lift rates. However, Trichet said that inflation expectations were “firmly anchored” and rates would not rise any time in the near future.

The summit meeting of EU leaders will see which measures have been incorporated into the “comprehensive package” long insisted upon by Angela Merkel, Germany’s chancellor. Germany has previously voiced its opposition to increasing the amount of the 440-billion-euro ($599.4 billion) bailout fund, insisting that other euro zone nations need to adopt stricter measures for debt control, among other things.

Merkel told reporters at her arrival for the meeting, “We will talk about how to prepare decisions that are still necessary, in particular with regard to the permanent crisis mechanism which is to be agreed by March.”

A source in French President Nicolas Sarkozy’s office was cited as saying that both Paris and Berlin intended that the 17 nations within the euro zone should make commitments on increasing the competitiveness of their economies; these measures would be reviewed at annual summits.

The unnamed source said, “We are at a key moment; markets are turning, doubts about the solidity of the euro and the euro zone are dissipating. This is the moment to take a great step forward.”

The official added that the package to be presented would include both Germany’s call for stricter financial discipline, with sanctions against nations that fail to comply, and France’s desire for euro zone summits on a regular basis for the building of a "European economic government" and coordination of policies to stimulate growth.

This "competitiveness pact" proposal would also include nations’ commitments to incorporate deficit curbs within their constitutions, increase the flexibility of both wages and labor markets, and tie pension systems to individual nations’ demographies.

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