Business Blog Posts

Germany has lowered expectations for a major breakthrough at the summit, saying the best that can be hoped for is an agreement on competitiveness.

Bigger decisions to tackle the crisis -- such as whether to strengthen the euro zone bailout fund -- will be handled at an end-March summit.

Instead, Germany's aim on Friday is to get the 17 euro zone states to enshrine EU rules on deficits and debt in national law -- effectively making it illegal for any euro zone member to exceed fixed deficit and debt limits in the future.

The EU's Stability and Growth Pact sets a government deficit limit of 3 percent of GDP and debt of 60 percent of GDP. Translating that into national laws would entail the adoption of a "debt brake," similar to what German law requires.

"Euro area member states commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation," the latest draft of the agreement euro zone leaders' are expected to sign up to on Friday reads.

"Member states will retain the choice of the specific national legal vehicle to be used, but will make sure that it has a sufficiently strong binding and durable nature (e.g. constitution or framework law)," the draft said.

If Germany and France can get the remaining euro zone members to sign up to the competitiveness pact -- which also includes moves to gradually raise retirement ages and work toward a common corporate tax base -- there is an expectation that Germany will agree to back a stronger bailout fund.

The European Financial Stability Facility, used to bail out Ireland, has an effective lending capacity of 250 billion euros ($345 billion), not its full 440 billion, because of guarantees needed to retain its triple-A credit rating.

Increasing the capacity will require German backing and all member states to increase their contributions or guarantees, not a straightforward task given popular opposition to bail outs. That debate will be taken up on March 24, but its outcome may depend on how much backing Germany gets on Friday.

While Euro zone leaders will hail any agreement on competitiveness as a big step in tackling the debt crisis, analysts regard it as a sideline issue, saying it goes nowhere toward tackling the fundamental problem of bad banking debts and highly indebted sovereigns with poor growth prospects.

In that respect, Friday's summit merely clears the ground for March 24-25, when a "comprehensive package" of measures leaders hope will draw a line under the crisis will be debated.

PORTUGAL BACK UNDER PRESSURE

Measures in the comprehensive package include the EFSF plus the European Stability Mechanism, a permanent fund that will replace the EFSF from mid-2013, and more stress tests to examine the stability of Europe's major banking firms.

While Germany has hinted that a deal on Friday may ease the way for it to back a stronger and potentially more flexible EFSF at the end-March summit, there are no guarantees.