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Portuguese government's fall throws EU summit into even more disarray

The resignation of Portuguese Prime Minister Socrates is just one of a string of reasons EU leaders are unlikely to find common ground on how to move forward with bailout funds at a summit in Brussels.

A man throws rocks towards a line of police

Thousands protested the summit in Brussels on Thursday

In the months leading up to the two-day summit of European Union leaders in Brussels, it was hoped that agreements could be made to firm up the bloc's plans for a rescue fund to help protect the eurozone against future debt crises.

But as the meeting got underway on Thursday, things looked far from being finalized. A number of recent developments have made a summit consensus even less likely than before.

The most recent was the resignation of Portuguese Prime Minister Jose Socrates on Wednesday night. His country is widely seen as the next eurozone country in line to receive an international financial bailout, and Socrates and his minority government had proposed drastic austerity measures to avoid accepting the handout. But Socrates couldn't get the measure to pass, and now a bailout seems inevitable.

Stay the course

German Chancellor Angela Merkel called on Portugal's political parties to stick to deficit reduction targets after Socrates' resignation.

"It's now very important that all those who speak for Portugal feel committed to the objectives of the program," she told reporters in Brussels. "The mistakes of the past cannot be allowed to return. We will ensure that such a thing does not happen again.

Jose Socrates

Socrates' resignation complicates the summit

"This is not only important for Portugal, but also for all of Europe and in particular for members of the eurozone," she added.

While Socrates is attending the EU summit as head of a caretaker Portuguese government, he will have no authority to vote on any measures proposed at the summit, which would require approval of all 17 eurozone nations. A new government may take two months to form in Portugal.

Finland, usually one of the EU's most cooperative members, is another stumbling block in rescue fund negotiations. The government has said it is unwilling to sign up to anything before April 17 elections, since it is the new parliament which would have to approve any agreement.

"I don't have the mandate from the parliament to increase [contributions to a rescue fund]," Finnish Prime Minister Mari Kiviniemi said in a recent interview with the Financial Times.

Bailout blockage

Even if Portugal and Finland could take part in a vote in the next two days, disagreement over the eurozone's next steps would probably stall a decision anyway.

The main issue is the eurozone's financial bailout mechanism, the European Financial Stability Facility (EFSF). The EFSF has a lending capacity of 250 billion euros ($352 billion). Although member nations have agreed to expand its capacity, they cannot agree how to do so.

In the long term, eurozone members have agreed to create a permanent bailout fund, the European Stability Mechanism (ESM), to replace the EFSF in 2013. While the effective size of the ESM has been set at 500 billion euros, conditions of how the mechanism could be triggered are still up for debate.

As the eurozone's biggest member by population, Germany would contribute the largest amount to the fund.

"There is only support [for the ESM] with fulfillment of certain conditions and a clear plan to reduce spending," said German Finance Minister Wolfgang Schäuble ahead of the summit. "And this would only apply if the stability of the euro itself was at stake. We see this as a last resort."

Thousands protest

Further disagreement is almost certain over the level of interest rates that Ireland is paying for its recent financial bailout. The country accepted a bailout last year to help rescue its banking sector. Now, Ireland is claiming the high interest rate to pay back the bailout is putting a burden on its economy. Other EU nations in turn are calling on Ireland to raise its unusually low corporate tax rate to come up with more money.

A street sign with arrows in different directions

EU countries are still divided for now

Stress tests are underway in Ireland's banking sector but will only be completed after the summit in Brussels. The results of the stress tests will likely play a role in any negotiations over Ireland's interest rates.

Despite coming into the summit with the intention of moving forward on a solution of Europe's debt crisis and the creation of permanent mechanisms to avoid another one, early speculation suggests that the only thing that will be accomplished by the end of the summit on Friday is an extension of the deadline for a decision to be made on these issues.

Meanwhile, crowds of up to 20,000 people gathered in Brussels, protesting the meeting and the austerity measures put forth by European governments to help combat their debt problems. These often include cuts to pension funds and public sector pay freezes.

Police reportedly used water cannon to disperse one group of demonstrators who tried to break through barriers and threw rocks at security personnel.

Author: Matt Zuvela, Dagmar Breitenbach (AFP, Reuters)
Editor: Michael Lawton

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