• The document is dominated by German demands say diplomats (Photo: European Communities)

Eurozone leaders agree on Franco-German bail-out mechanism

25.03.10 @ 22:37

  1. By Andrew Willis

BRUSSELS - France and Germany have brokered an emergency financing mechanism to help Greece, following extensive bilateral negotiations between the two sides earlier on Thursday (25 March).

Under the deal, approved by eurozone leaders after late evening talks, a funding package will be created, made up of voluntary contributions from euro area countries and cash from the International Monetary Fund.

With the document dominated by German thinking, France is claiming a reduced IMF role as its negotiating victory.

"As part of a package involving substantial International Monetary Fund financing and a majority of European financing, euro area member states are ready to contribute to co-ordinated bilateral loans," says an earlier Franco-German text.

Diplomats suggested the pot for Greece could total €22 billion, with Athens reportedly welcoming the deal.

However, the mechanism is theoretically open to all 16 euro area states, not just Greece, with any disbursements requiring further unanimous eurozone approval. In addition, payouts will be subject to "strong conditionality and based on an assessment by the European Commission and the European Central Bank."

Echoing earlier demands made by Germany Chancellor Angela Merkel, the one-page document says the mechanism must be considered as a last resort, a bid to help the German leader persuade her citizens ahead of crucial regional elections that support for Greece is also in their interest.

While contributions are to be made on a voluntary basis, its authors say they "expect euro-member states to participate on the basis of their respective ECB capital key," an index which relates to a country's GDP.

Loans provided from the fund will also be subject to non-concessional interest rates, "i.e., not contain any subsidy element", in a bid to encourage borrowers to return to capital markets as quickly as possible.

Analysts have suggested in recent weeks that Ms Merkel's earlier reluctance to agree to a mechanism stemmed in part from concerns over potential legal challenges regarding EU Treaty and German constitutional rules.

"Decisions under this mechanism will be taken in full consistency with the [EU] Treaty framework and national laws," says the text.

The plans also envisage greater European economic co-ordination in the future, and provide for the European Council under Herman Van Rompuy to play a greater role.

"We consider that the European Council should become the economic government of the European Union and we propose to increase its role in economic surveillance," says the document.

German finance minister Wolfgang Schaeuble recently called for eurozone rules to be significantly tightened, including the possibility of expelling members that repeatedly flaunt restrictions.

"For the future, surveillance of economic and budgetary risks and the instruments for their prevention, including the excessive deficit procedure, must be strengthened. Moreover, we need a robust framework for crisis resolution," says the text.

Mr Van Rompuy has been asked to form a task force composed of representatives from the member states, the ECB and the European Commission to present plans by the end of the year regarding the need for legal changes in this area.

It was only at the last minute however that the presence of the commission was added into the mix.