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Eurozone 'agrees in principle' on policy co-ordination

European leaders gather in Brussels
Image caption European leaders have different ideas on how best to solve the debt crisis

Eurozone leaders have reached an agreement in principle on a pact to co-ordinate economic policies, EU President Herman Van Rompuy has said.

Other elements of the package were still under discussion, he added.

Eurozone leaders are in Brussels to try to find a way out of the debt crisis that has dogged the region for more than a year.

Earlier, Greek Prime Minister George Papandreou had called for Europe to take "strong decisions".

In a message on Twitter, Mr Van Rompuy had initially said: "We have an agreement on the Pact for Euro."

The message was later amended to: "Update from ongoing meeting: Agreement in principle on the Pact for the Euro, but still discussing the other elements of the package."

A pact would give members a say over each other's major economic policies - a move aimed at keeping countries under firm fiscal discipline.

Any agreement would need to be endorsed at a summit of all 27 EU states on 24-25 March.

Collective action

Also under discussion at the meeting is a new permanent, extended replacement for the 440bn-euro (£379bn; $614bn) bail-out fund.

The markets most keenly want to see signs of progress on the establishment of the new European Stability Mechanism (ESM).

At 500bn euros, this will have double the effective lending capacity of the current European Financial Stability Facility (EFSF), which was used in the bail-out of the Republic of Ireland.

Earlier, Greek PM Mr Papandreou had said his country - the first to need bailing out by its eurozone partners and others - had done all it could, and now needed collective action.

"On the financial eurozone crisis, we are on top of our programme, we have taken the pain to make our economy viable, but now we need European decisions - strong European decisions - to calm the market."

The Eurogroup chairman, Jean-Claude Juncker, said on Friday he had no reason to doubt the solvency of Greece after its bail-out by the European Union and International Monetary Fund (IMF).

Greece and the Republic of Ireland are also expected to press for easier repayment terms.

The newly-elected Irish Prime Minister, Enda Kenny, said: "I've come here with two days in government with a very strong mandate from the Irish people for an improvement in the terms of the EU-IMF deal."

His country received 67.5bn euros in support from the International Monetary Fund and other EU countries.

'Clear steps'

Persistent fears about the levels of debt in some European countries, notably Greece and Portugal, have caused their cost of borrowing to again reach record levels in recent days.

Higher spending and lower taxation countries, which also include Spain, have had to pay more to borrow money than more prudent countries.

They are all making efforts to get their huge borrowings down, with Portugal announcing fresh spending cuts and tax rises on Friday and promising again that its deficit would meet its target of 4.6% this year.

The move was welcomed by the European monetary affairs Commissioner, Olli Rehn, who said these were "clear and important" steps that would help Lisbon regain control over its debt and end uncertainties.

Despite this, a note from the research firm, High Frequency Economics, pointed out that Portugal's borrowing costs had risen to levels that would drive it to seek help from the EFSF and the IMF.

Meanwhile, Spain, one of the countries the markets fear may next need a bail-out, this week had its credit rating downgraded amid fears about the ability of the government to restore its finances and about the cost of restructuring its banks.

Deficit and debt targets

Other moves to safeguard the euro include Germany's desire to see the target of keeping government deficits to below 3% of gross domestic product (GDP) enshrined in law, something it has already done.

The latest draft of the agreement reads: "Euro area member states commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation."

The EU's Stability and Growth Pact also sets a debt limit of 60% of GDP.

The draft also includes proposals for lower labour taxes, a common corporate tax base and indexing retirement age to life expectancy.

Ruled out

But the Republic of Ireland, which at 12.5% has one of the lowest corporation tax rates in the EU and attracts the lion's share of EU foreign direct investment, has already ruled out making any changes to that.

Enda Kenny said Dublin would resist German efforts to introduce a common corporate tax base.

Mr Kenny told the state broadcaster RTE such a move would be "a harmonisation of tax by the back door".

Countries including Germany and France regard differences in taxation and spending between eurozone members as key factors in creating the debt crisis.

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