Anger simmers at German austerity plan for EU

ATHENS/WARSAW Mon Feb 7, 2011 1:17pm EST

Germany's Chancellor Angela Merkel addresses a news conference at the end of an European Union leaders summit in Brussels, February 4, 2011. REUTERS/Thierry Roge

Germany's Chancellor Angela Merkel addresses a news conference at the end of an European Union leaders summit in Brussels, February 4, 2011.

Credit: Reuters/Thierry Roge

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ATHENS/WARSAW (Reuters) - Resentment smouldered among European governments Monday over a German-instigated drive to end wage indexation, raise retirement ages and lock debt limits into national constitutions across the euro zone.

Chancellor Angela Merkel, backed by French President Nicolas Sarkozy, presented proposals for a "competitiveness pact" to EU leaders at a summit last Friday, provoking strong pushback due to both a lack of prior consultation and the objectives chosen.

Merkel made clear that agreement on these measures, designed to align economic policies more closely with Berlin's, must be sealed in March before she will agree to strengthening the rescue fund for debt-stricken euro zone countries.

"The negotiations will be tough, that's clear already. But we want an agreement and there is still a bit of time," she told a news conference after talks in Warsaw Monday with Polish President Bronislaw Komorowski and Sarkozy.

EU Monetary Affairs Commissioner Olli Rehn said EU leaders had given clear support for boosting the effective capacity of the euro zone's emergency fund and making it more flexible.

"It is work in progress and I expect we will have decisions in the course of March," he said.

A senior source in Germany's governing coalition also said the heads of government had made good progress on beefing up the European Financial Stability Facility (EFSF), and he expected an agreement before the next formal EU summit on March 24-25.

Greece, already subject to a tough austerity program in return for a 110 billion euro ($150 billion) EU/IMF bailout last year, voiced opposition to the attempt to make member states change their constitution if they want financial assistance in future.

"I reject categorically the thought of an EU decision to intervene in all national constitutions," Deputy Prime Minister Theodoros Pangalos told daily Ta Nea in an interview.

"The thought that this be a precondition for joining in the German rescue plan is not attractive to me," he said.

ACRIMONY

Diplomats said Friday's EU summit was acrimonious with lots of finger-pointing at other countries' alleged shortcomings.

Belgium, whose caretaker government can ill afford a social crisis, objected to scrapping inflation-indexing of wages. Under the Belgian system, trade unions accepted a wage cut without protest last year because prices had fallen.

Portugal, Luxembourg, Austria and Spain, which all have elements of automatic inflation adjustment, were also opposed.

Italy, which has the EU's second highest debt-to-GDP ratio after Greece, disliked the proposal to anchor binding debt reduction targets in its constitution.

Austria said it opposed any EU-wide retirement age or centrally mandated system for linking the retirement age to demographic trends in each member state.

Ireland, which is counting on foreign investment to help it recover from its own bailout, rejected the idea of setting a minimum corporation tax level in the euro zone or harmonizing the corporate tax base.

A senior official from one southern European country, speaking on condition of anonymity, said the Franco-German plan addressed issues that had little or nothing to do with the causes of the euro zone crisis.

"If we have to agree on a package, the first test is: If we had this package five years ago, would the crisis have been avoided? A package containing only tougher fiscal rules would not have prevented crisis in Ireland, Spain, Portugal, all of which had very solid public finances," he said.

"Some countries look only at public finance and forget the rest. I have the feeling that there is too much emphasis on debt reduction," said the official from a highly-indebted country.

RUFFLED FEATHERS

Seeking to smooth ruffled feathers, Merkel and Sarkozy evaded questions about objections to their initiative and said they hoped Poland would join the "competitiveness pact," even though it is not yet in the euro area.

French officials have said the individual measures in the pact are open to negotiation, and Merkel said she was awaiting proposals from the executive European Commission in this area.

The European Central Bank disclosed Monday that it had bought no euro zone government bonds for the second week running in a fresh sign that market tensions have eased in expectations of a comprehensive response to the debt crisis in March.

Portugal took advantage of this lull to launch a five-year syndicated bond issue and said demand was a healthy 6 billion euros -- double the minimum planned placement.

ECB policymaker Axel Weber, head of Germany's influential Bundesbank, said reforms to the EU's budget discipline rules agreed so far made some improvements but did not go far enough.

"The major shortcoming of the envisaged reform is that relevant decisions on sanctions are still to be taken at a political level by the European Council," he said in a speech prepared for delivery in Tallinn.

This left "too much room for discretion in interpreting and applying the rules," Weber said.

(additional reporting by Stephen Brown in Berlin, Julien Toyer in Brussels, James Mackenzie in Rome; writing by Paul Taylor, editing by Mike Peacock/Ruth Pitchford)

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