POLITICS

Europe on edge ahead of crucial EU summit

ECB cuts interest rates back to historic low of 1 per cent. Standard & Poor’s threatens to downgrade the entire European Union’s rating, while a French minister warns that the Euro could “explode.”

European Union leaders were heading yesterday into a key summit in Brussels, where they would be trying to clinch a deal on how to tackle the eurozone debt crisis. The talks have been described by analysts as “do-or-die” for the 17 eurozone nations, the BBC said. Germany and France are pushing for new EU treaties, saying stricter fiscal rules should be enshrined there.

Meanwhile, just ahead of the summit, the European Central Bank cut interest rates back to their historic low of 1 per cent, as expected by markets. The ECB is also thought to be preparing a bailout for the Italian government. It is the second such rate cut since Mario Draghi took over the ECB presidency last month.

European Commission chief Jose Manuel Barroso, who was in the French city of Marseille earlier yesterday, has urged EU to “do everything” to save the euro ahead of the Brussels summit. “The entire world is watching. We must do everything” to save the euro, he said, adding: “It is extremely important that we all together, all the EU, show that the euro is irreversible.”

Barroso was attending the annual congress of the centre-right grouping in the European Parliament, the European People’s Party (EPP), in the southern French city, which French President Nicolas Sarkozy and German Chancellor Angela Merkel also attended. Romanian President Traian Basescu and Prime Minister Emil Boc were also in Marseille for the EPP meeting ahead of the European Council summit.

In his speech at the meeting, Sarkozy warned that “never has the risk of disintegration been greater” for Europe. Meanwhile, French Europe Minister Jean Leonetti has said the single currency and the EU itself could be under threat if leaders fail to tackle the debt crisis.

“The situation is serious – the euro can explode and Europe unravel,” he told French TV. “That can be a catastrophe not just for Europe and for France but for the world.”

Further woes came from Standard & Poor’s threat that it could review the top AAA credit rating of the European Union for possible downgrade. A rating cut would affect the bloc as a whole, but not individual members. The ratings of non-eurozone countries such as the UK are not at risk. S&P indicated that the EU’s rating would be cut one level to AA+ if it decided to downgrade either France or Germany or both. On Wednesday, the rating agency also put a string of major eurozone banks on review for downgrade.

Merkel-Sarkozy letter

The key proposal on the agenda of the gathering in the Belgian capital was how to enforce budgetary discipline with automatic penalties for those eurozone nations that overspend.

Merkel and Sarkozy are seeking to enforce this by changing the existing EU treaties. “We are convinced that we need to act without delay,” the two leaders wrote in a joint letter to European Council President Herman Van Rompuy, adding that the new treaty was needed by March. Van Rompuy is offering a plan which requires only amending the treaties.

Banks prepare for ‘life after euro’

Some central banks in Europe have started weighing contingency plans to prepare for the possibility that countries leave the eurozone or the currency union breaks apart entirely, according to people familiar with the matter, quoted by the ‘Wall Street Journal.’ The first signs are surfacing that central banks are thinking about how to resuscitate currencies based on bank notes that haven’t been printed since the first Euros went into circulation in January 2002. At least one, the Central Bank of Ireland, is evaluating whether it needs to secure additional access to printing presses in case it has to churn out new bank notes to support a reborn national currency, the publication said.

PWC: four potential outcomes for 2012

A PricewaterhouseCoopers report, called “What next for the Eurozone – Possible scenarios for 2012,” analysed four possible outcomes of the crisis next year. These are: monetary expansion through a liquidity injection from the European Central Bank, orderly defaults for the most indebted countries, Greek exit from the eurozone and a new currency bloc. “We expect these scenarios could have an impact well beyond the eurozone. Countries like the UK and US, or countries in the CEE region, such as Romania,  are likely to see falls in exports and banking sector problems,” said Yael Selfin, head of macro-consulting and a director in PwC’s economics team, in a press release sent to our newsroom.

Basescu calls for EU unity

In his speech at the European People’s Party Congress in Marseille yesterday, President Traian Basescu said that the solution to the current crisis is to remain united. “To remain 27 EU member states, not only the 17 in the eurozone,” the president said.

He underlined that what is happening in the eurozone is “dramatically” affecting the daily life of all people from the other EU member states, including Romania. Basescu explained that 95 per cent of the banking market in Romania is controlled by institutions from the eurozone. “The interest rate increased from five per cent in June to over eight per cent now, because of the lack of decisions in the eurozone,” he added.

The president also said Romania remains very dependant on eurozone markets in what regards its exports, since its main partners are Germany, France, Italy and Spain.

“Romania cannot accept an EU with two categories of states. Romania would also like to participate in eurozone decisions because any decisions or lack of decisions are affecting the daily life of Romanian citizens,” he told EPP delegates.

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