EU leaders issue "solemn pact" to boost euro

October 29, 2010
European Commission President Jose Manuel Barroso gestures as he addresses the media after an EU summit in Brussels on Friday, Oct. 29, 2010. European Union leaders are at pains to inject more financial discipline into eurozone nations to prevent another debt crisis from gutting confidence in Europe's single currency. (AP Photo/Geert Vanden Wijngaert)
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European Commission President Jose Manuel Barroso gestures as he addresses the media after an EU summit in Brussels on Friday, Oct. 29, 2010. European Union leaders are at pains to inject more financial discipline into eurozone nations to prevent another debt crisis from gutting confidence in Europe's single currency.

The European Union leaders say they have "sealed a solemn pact" to shore up the stability of the euro by tightening rules aimed at reining in spendthrift governments.

EU President Herman van Rompuy said at a summit Friday that the union's 27 leaders have "sealed a solemn pact to strengthen the euro."

He said they will craft a financial safety net to secure the stability Europe's single currency, punish nations with excessive deficits and debts and monitor their budgets more strictly.

Greece almost went bankrupt earlier this year, shaking the foundations of the monetary union. Other countries such as Spain and Ireland are also in financial trouble.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

BRUSSELS (AP) — EU leaders on Friday agreed on tougher rules for spendthrift nations whose overspending threatens Europe's single currency and risks triggering a debt crisis.

They also agreed on crisis mechanism to safeguard the stability of the eurozone but details need to be worked in the months ahead, notably on whether to bring in private creditors to ease the burden for taxpayers.

At any rate, EU President Herman van Rompuy said the bloc was planning for a "robust and credible permanent crisis mechanism to safeguard the stability of the eurozone as a whole."

He said the point of the economic governance measures was to "deter bad budgetary behavior" by fining countries that run excessive deficits and debts much earlier than now. Also their budgets will come under review by the EU."

The EU leaders did not yield to a demand by German Chancellor Angela Merkel that violators of the euro rules lose their voting rights in the EU.

The crisis mechanism will be a safety net to prevent another debt crisis such as the one that gripped the eurozone this year when Greece nearly defaulted.

Merkel said that "when the euro as a whole gets into danger, EU states will be allowed to intervene but only under strict conditions."

Van Rompuy said he will see in the months ahead if it can be put into the EU treaty without requiring a major rewrite.

Diplomats said a simple tweaking of the treaty could avoid the need for national referendums.

That is important because getting approval for the current EU Treaty from 27 governments took 10 years, after Dutch and French voters killed an earlier version in 2005. Irish voters have also repeatedly dismissed treaty amendments.

Last spring, the EU had to come up with hundreds of billions of euros in support of Greece, Ireland, Portugal and Spain after their deficits and debts hit the ceiling.

"We want to make clear that a policy that threatens the euro as a whole also rattles the fundamental values of the EU," said Merkel.

She suggested undermining those values by running excessive deficits and debts should cost offenders their voting rights.

European Commission President Manuel Barroso called losing voting rights "unacceptable," adding it would never get approval from all 27 EU governments.

This view was echoed by several European leaders and EU officials.

"That is a non-flier. That would create problems for many countries," said Swedish Prime Minister Fredrik Reinfeldt.

Merkel and French President Nicolas Sarkozy came to the summit seeking a system which would force private creditors to bear some of the cost of bailing out a highly indebted country and not dump all the pain on taxpayers.

The German leader said any rescue system should include "banks and funds — who primarily benefit from high interest rates. That means that the taxpayer no longer carries the whole responsibility."

The debt crisis that has gripped Greece and Ireland — and to a lesser extent Portugal and Spain — has left the 16-nation eurozone scrambling for stricter enforcement of rules aimed at keeping governments from running big deficits and undermining the shared currency. Greece needed a rescue loan to avoid bankruptcy earlier this year, a crisis that sent shock waves through the currency union.

Even before the financial crisis of 2008, many EU countries broke limits on deficits and public debt of 3 percent and 60 percent of GDP respectively.

Existing provisions to punish overspending governments were never enforced as EU governments lacked the political will to punish fellow members of the club. Caps on deficits are needed because overspending can undermine the euro.

Merkel is under pressure from German taxpayers who bridle at seeing their money put on the line to cover the excesses of less disciplined countries. Germany is the biggest contributor to the euro110 billion ($152 billion) emergency loan given to Greece, and to a euro440 billion ($607 billion) stability fund for the wider eurozone that would not be tapped unless needed.

These two backstops expire in 2013, when Greece's debt will likely reach 150 percent of GDP, more than double than is allowed under the eurozone rules.

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AP Business Writer Gabriele Steinhauser and Robert Wielaard contributed to this story.