France, Germany launch EU competitiveness pact

Germany and France proposed a competitiveness pact for Europe on Friday and EU leaders discussed strengthening a euro zone rescue fund, hoping to win back market confidence in the bloc's public finances.

Paris and Berlin — the driving forces behind euro zone policy — set out a wish-list of measures they want euro zone and other countries to sign up to including:
 

• limits on debt levels written into national laws
• a higher retirement age, based on demography
• the abolition of wages indexed to inflation, and
• a minimum corporate tax rate.

"Germany and France will make it very obvious that we intend to defend the euro as a currency... we also want to defend it as a political project," German Chancellor Angela Merkel told a joint news conference with French President Nicolas Sarkozy just before a presentation to EU leaders.

"We want to send out a clear message, that as the European Union, we intend to grow together. What we want to establish is a pact for competitiveness," she said.

The two biggest euro zone economies want the pact to be part of a "comprehensive package" that leaders agree to in March, when they hope to pass a series of measures to help draw a line under the euro zone's year-long sovereign debt crisis.                                             

"We are working hand in glove, France and Germany, with a clear, total determination to support the euro," Sarkozy said.

The package is to include changes to the European Financial Stability Facility, the €440 billion bailout fund agreed last May, to increase its effective lending capacity and give it more flexibility on how to use its money.

In draft conclusions prepared ahead of the summit, the 27 heads of state and government said they would consider "concrete proposals" for strengthening the EFSF "to ensure the necessary flexibility and financial capacity to provide adequate support", with those discussions being finalized next month.                                            

EU diplomats said no major decisions would be taken on Friday as market pressure on debt of Greece, Ireland, Portugal or Spain has eased. But officials understand that failure to agree on concrete measures before the next scheduled summit on March 24-25 could reignite the conflagration in the markets.                                            

In a sign of returning investor confidence, Spain's borrowing costs fell sharply at bond auctions on Thursday. Portugal has also had encouraging recent debt sales.

Strengthening the EFSF has been the focus of discussion for months, since it became clear its effective lending capacity was only about 250 billion euros, not 440 billion, due to guarantees built into the fund to maintain its triple-A credit rating.                                            

Given its lending limitations, there are concerns that if Portugal and Spain were both to end up needing a bailout, the EFSF would not have sufficient funds. 

European Central Bank President Jean-Claude Trichet, who held talks with EU leaders over lunch, is among those calling for the EFSF to be enlarged and made more flexible, so that it is not just a bailout lender of last resort.

The EFSF is the chief weapon in the EU's arsenal, but deep disagreement remains over how it should be strengthened, with Germany determined to secure stricter budgetary commitments from other euro zone members and reforms boosting competitiveness in exchange for agreeing amendments to the fund.

Economics and Monetary Affairs Commissioner Olli Rehn praised Germany for entering the crisis stronger than others in the EU thanks to broad structural reforms since the 1990s.

"It is important for everyone that other countries now manage to do what Germany and a few other member states have already managed in past years," Rehn wrote in a column in the German daily Handelsblatt.

Most of the proposals by Berlin and Paris have already been set out by the European Commission in January in its Annual Growth Survey as part of the new, tighter budget coordination process called the European Semester.

"The ideas presented by some member states fit very well with this overall approach of reinforcing our governance," European Commission President Jose Manuel Barroso said. 

But some of the competitiveness reforms proposed by Brussels, Paris and Berlin met with immediate resistance. 

"I don't think it's possible for the European Union to regulate the pension age because there are large differences in the individual countries," Austrian Chancellor Werner Faymann  said. "I don't think it's right to interfere in wage negotiations, like some have demanded."                                            

There remains the risk that Friday's summit will underline just how far apart states remain, with Germany largely backed by the likes of France, Finland and the Netherlands, while Greece, Italy, Spain and others pull in different directions.                                            

Euro zone officials privately express concerns about how slowly work is progressing and say they doubt whether a complete package can be agreed by late March. Leaders will consider holding an extra summit in early March to maintain momentum.