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European debt debates

May 24, 2012

Dutch parliamentarians have officially approved the eurozone's new rainy-day fund, while their German counterparts are debating another cost-cutting bill. Meanwhile, the head of the ECB issued a rallying call in Italy.

ECB headquarters in Frankfurt
Image: dapd

European Central Bank chief Mario Draghi called for greater political vision among European Union leaders as the bloc seeks to combat its debt-related difficulties.

Speaking at Sapienza University in Rome, Draghi said the EU was at "a crucial moment in its history," and warned that "the process of European integration needs a courageous jump in political imagination to survive," according to a speech quoted by the AFP news agency.

The central bank president was addressing students shortly after the latest EU leader's summit drew to a relatively inconclusive halt in Brussels in the small hours of Thursday morning.

"Eurozone member governments must together and irreversibly define their vision of the economic and political construction which will sustain the single currency," Draghi said, referring to the 17-member bloc of EU countries that use the euro.

One of the main disagreements at the Brussels summit focused on the potential issuing of so-called Eurobonds, a system by which eurozone countries would collectively guarantee each other's international borrowing. The goal would be to secure lower interest rates for more troubled countries, but skeptical parties like Germany are concerned about the resultant risks and higher borrowing costs they would incur.

Merkel seeks opposition votes on EU treaty # 24.05.2012 14 Uhr # fiskal12d # Journal englisch

Cost-cutting and firewalls

Back in Berlin, however, parliamentarians turned their attention to a different angle of deficit management, debating the "fiscal pact."

Twenty-five EU members, the exceptions being the UK and Czech Republic, have signed up to the deal in principle. The idea is that countries commit to keeping their annual budget deficits within the pre-agreed EU upper limit of three percent of economic output, agreeing to face sanctions if they fail.

Though Germany in theory agreed at an EU leaders' summit in December, the measure still needs to be ratified in parliament - a move that is liable to take at least another month.

The opposition Social Democrats and Greens have said they will support the measure, but only if it's complemented by what they call a "growth and investment pact." This position is similar to that of recently-elected French President Francois Hollande, who also advocates a mixture of spending and saving to target the bloc's economic problems.

Chancellor Angela Merkel and Sigmar Gabriel of the opposition Social Democrats
Merkel and Gabriel, once coalition partners, are now debating economic policyImage: AP

"We have not reached any concrete results today," Social Democrat leader Sigmar Gabriel said after the talks in the chancellery, "but it has become clear that [Chancellor Angela] Merkel and her government could be moved to a growth pact."

The parliamentary party leaders for Merkel's Christian Democrats and her Free Democrat coalition partners, Volker Kauder and Rainer Brüderle, both alluded to a "good discussion," without elaborating.

Netherlands approves rainy-day fund

There was more concrete progress, meanwhile, to the west in The Hague.

Parliamentarians in the Netherlands on Thursday approved the European Stability Mechanism (ESM) - the eurozone's permanent rescue fund that would provide any future international assistance similar to the loans already granted to Greece, Ireland and Portugal.

House speaker Gerdi Verbeet said the motion had passed by 100 votes to 47, despite fierce opposition from Geert Wilder's far-right Freedom Party and the Socialists.

The Netherlands is to provide a theoretical 40 billion euros (roughly $50 billion) to the fund, made up of about 4.6 billion in installments over five years and a further 35 billion euros in credit guarantees.

Most of the ESM's theoretical lending capacity of 500 billion euros is made up not of hard currency, but of loans underwritten by the bloc's healthier economies.

The ESM is due to be officially launched on July 1. Germany's Bundestag is to debate it in June.

msh/pfd (AFP, dapd, dpa, Reuters)