Europe

Q&A: EU crisis mechanism

The EU has agreed to set up a permanent mechanism to avert Greek-style financial crises in the eurozone, in its biggest monetary reform since the euro was introduced in 1999.

An outline of the mechanism, which includes a permanent rescue fund, was presented to a summit of EU leaders in Brussels on 28 October.

Two of the EU's biggest states, Germany and France, proposed taking the plan much further - too far, in the opinion of some.

Why does the EU need this mechanism?

Greece's debt crisis of the spring of 2010 shook the eurozone. Eurozone states and the IMF bailed out the Greek government with a 110bn-euro (£95bn, $146.2bn), three-year package of loans. Large deficits in other eurozone states such as Spain and the Irish Republic have caused continuing uncertainty and fears of contagion.

Isn't there a rescue fund already?

Yes. Following the Greek bail-out, EU states committed 440bn euros to a fund set up along with the IMF. But the fund, which totals 750bn euros, is due to expire in June 2013. By making it permanent, the EU would reassure markets.

What's so radical about the new plan?

At present, the EU can only punish states which run up deficits above an agreed 3% ceiling. Under the proposed mechanism, it could slap sanctions on any state deemed to be following a dangerous economic policy, even before they passed the 3% ceiling. Excessive public debt would also trigger sanctions.

How much bite would these new sanctions have?

They are designed to escalate. Offenders would first be forced to make interest-bearing deposits. If they continued offending, they would stand to lose the interest on these. On down the line, there would be fines. Other sanctions being discussed include cuts to EU subsidies.

So what do the French and Germans want to add?

Under a proposal Berlin and Paris drafted independently before the summit, eurozone debt offenders could be stripped of their EU voting rights temporarily - an idea opposed by some other EU states. The wealthy Germans, wary of being left to bear the biggest burden in any rescue, also want private sector banks which buy government-issued bonds to absorb more of the losses when states get into financial difficulties.

There is talk of rewriting the Lisbon Treaty...

Germany and France believe that to ensure the new mechanism works, it must be enshrined in the EU's main treaty. Their EU counterparts agreed at the summit, reportedly with much reluctance, that there would have to be "limited" changes to a treaty which took eight years to negotiate and only became law 10 months ago. The changes would have to be approved by the national parliaments of all 27 EU member-states.

All 27? What about the non-euro states?

The mechanism would fully apply to both euro and would-be euro states. That leaves just the UK and Denmark, which both negotiated budget rule exemptions in the Lisbon Treaty. While their budgets would come under closer scrutiny under the mechanism, neither country would face sanctions.

What happens next?

The EU leaders agreed at their summit that the new mechanism should be ratified no later than the middle of 2013 - when the temporary rescue fund expires. They are to meet again in December to hear back from the EU President, Herman Van Rompuy. At this meeting, they aim to take the final decisions both on the outline of the new crisis mechanism and on a "limited treaty amendment".

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