EU eyes permanent mechanism to manage future debt crisis

BRUSSELS, Dec. 15 -- European Union (EU) leaders will gather for their two-day summit on Thursday and Friday, looking to establish a permanent bailout mechanism to manage future debt crisis.


During their autumn summit meeting, the leaders agreed to introduce "limited change" to the Lisbon treaty to allow for the establishment of a permanent crisis management mechanism to safeguard the stability of the eurozone as a whole.

"We will focus on the main issue on our agenda: the limited amendment to the Treaty in order for a permanent mechanism to be established by the Member States of the euro area to safeguard the financial stability of the euro area as a whole," President of the European Council Herman Van Rompuy said in an invitation letter to the leaders.

According to draft documents obtained by the local media, a two-sentence paragraph will be added to the Lisbon treaty, which says "The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality."

After the Greece debt crisis, the EU put together with the International Monetary Fund (IMF) a 750-billion-euro rescue fund to bail out countries that may fall prey to the debt crisis. But the mechanism will expire in 2013.

Germany, the largest contributor to the rescue fund, has argued that the rescue fund is against the so-called non-bailout clause of the Lisbon treaty and called for a change in the treaty to lay a solid foundation for future rescue mechanisms.

The limited change will be conducted in a simplified revision procedure that does not need referendums in member states and will come into force in 2013.

"We need to reach an agreement on a draft decision at our meeting in order for procedures to be launched as fast as possible, both at the EU and national levels, so that this decision can enter into force on 1 January 2013," Van Rompuy said in his letter.

According to the agreement reached at an emergency meeting of EU finance ministers last month, the permanent mechanism, namely the European Stability Mechnism (ESM), will be based on the 440-billion-euro European Financial Stability Facility (EFSF), which is the lion share of the 750-billion-euro rescue fund and is funded by eurozone member states.

But the aid to the member states will be accompanies with "a stringent program of economic and fiscal adjustment and on a rigorous debt sustainability analysis conducted by the European Commission and the IMF, in liaison with the ECB," the ministers said in a statement. And a unanimous decision will be needed by eurogroup ministers to provide the aid.

Another important element of the permanent mechanism is to involve the private sector in future bailout packages, a long-time call from Germany.

"Rules will be adapted to provide for a case by case participation of private sector creditors, full consistent with IMF polices," the ministers said.

To dispel market concerns, the ministers stressed that involvement of the private sector will not be effective before mid-2013 when the temporary rescue fund expires.

The EU leaders are expected to endorse decisions made by the finance ministers.

Recent hot topics such as enlargement of the 750-billion-euro rescue fund and issuing of euro bonds, however, will not be on the agenda of the leaders' summit, according to diplomatic sources.

Germany has been against the two ideas floated recently among some member states and EU officials.