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The Greek sovereign debt crisis is forcing Europeans to rethink the coordination of their national economic policies, confronting the euro area with its most severe test since its launch eleven years ago.

In January 2010, Greece was found sitting on debts that are expected to hit 290 billion euro this year. Its budget deficit stood at 12.7% of gross domestic product, more than four times the EU limit. 

Faced with an unprecedented speculative attack on the euro, EU countries were compelled to act decisively in order to calm jittery financial markets. In May, they agreed to establish a rescue mechanism worth €750 billion to protect the euro from collapsing under the weight of accumulated debt (EurActiv 10/05/10). Root causes left unaddressed However, the short-term fire-fighting measured soon proved insufficient to tackle the root causes of the problem as markets started questioning the loose coordination of national policies that underpin the eurozone’s economic governance. Indeed, EU institutions currently only have limited powers on economic policy, an area where unanimity decision-making remains the rule. The EU’s main instruments include reviews and non-binding recommendations by the European Commission, such as the stability and convergence programmes and Broad Economic Policy Guidelines, which are submitted for approval by member states in the EU Council of Minister.

Britain and other European Union countries put their weight behind Franco-German calls for tougher eurozone rules at a summit today (29 October), agreeing on "limited" changes to the EU's main treaty in return for a cap on the EU budget.

Officials struggled to deliver the message that legal tricks could accommodate both Germany's push for treaty change and conflicting calls from several other countries which had rejected the idea. Regarding treaty change, the key word is "simplified", officials explained. A simplified provision, enshrined in Article 48, Section 6 of the Lisbon Treaty, allows member countries to unanimously adopt a decision amending all or part of the main elements of the Treaty on the Functioning of the EU (TFEU), which governs how the Union carries out its work. Such a procedure would avoid the need to call a constitutional convention, experts explained. In addition, the European Parliament would only be "consulted" instead of enjoying full voting rights as part of the normal co-decision procedure. The changes to the treaty are to be settled by mid-2013, before the expiry of the present emergency fund agreed earlier this year to deal with crises such as the one that hit Greece. The objective is to replace that with a permanent mechanism. The simplified treaty change procedure will not enter into force until it is approved by member states in accordance with their constitutions. Most EU countries are expected to ratify the decision by a simplified procedure in their parliaments. As for Ireland, it remains unclear whether a change effected in this way would require another referendum.

UK Prime Minister David Cameron appears to have been instrumental in forging a deal, lending his backing to Franco-German calls for treaty change in return for keeping a lid on the EU's 2011 budget. 11 member states, including Britain, France and Germany, will send a letter to the European Commission and Parliament today saying that their plans to increase the EU budget by 5.9% in 2011 are "especially unacceptable at a time when we are having to take difficult decisions at national level to control public expenditure". The letter was signed by the leaders of the UK, Germany, France, the Netherlands, Sweden, the Czech Republic, Denmark, Austria, Finland, Slovenia and Estonia. The bloc's finance ministers had earlier voted for a limited increase in the EU budget of 2.9%. "We are clear that we cannot accept any more than the 2.9% increase proposed by the finance ministers," the leaders say in the letter. Cameron argued that a planned increase in the EU budget would cost his country's taxpayers the equivalent of one billion euros. The 2.9% rise would still cost them £435m (500m euros). Parliament to fight back By agreeing to cap the budget, EU leaders set themselves on a collision course with the European parliament, which has the power to approve or reject the proposed budget. Negotiations between the European Parliament and the Council, which represents the 27 member countries, over the EU's 2011 budget kicked off on 27 October (see 'Background'). "If Cameron is prepared to give up the British rebate [...] then we can for sure discuss a reduction of the budget," said Martin Schulz, leader of the Socialist & Democrats group in the European Parliament, speaking to EUX.TV, the European policy news channel powered by EurActiv. "The European budget is not to be compared with national budgets," said Schulz. "There are no own resources. We have no European taxes. We have no own money. It is money coming from the member states. We can make no debts. The British budget must be reduced because there is enormous debt. Europe has no debts," he said.

German Chancellor Angela Merkel has pressed EU leaders to accept the treaty change as she fears Germany's powerful constitutional court may raise objections to the €440 billion temporary European Financial Stability Facility (EFSF), agreed in May and set to provide aid to Ireland. While EU policymakers insist the temporary facility and earlier aid to Greece do not contravene the EU treaty's 'no bail-out clause', Berlin is keen to remove any legal uncertainty, with a number of legal challenges currently under examination by the German court.

The treaty change is to take place under a new procedure introduced under the Lisbon Treaty - the simplified revision procedure - allowing for limited treaty changes without the setting up of a convention, on condition that new powers are not transferred from the national to EU level. In the draft conclusions, EU leaders also call on euro area finance ministers and the commission to finalise work on setting up the permanent aid mechanism, including features that could force sovereign bond holders to accept diminished returns on their investments, should a eurozone government be forced to call for aid under the ESM from 2013 onwards. The move stands in marked contrast to aid terms recently agreed for Ireland, under which holders of Irish sovereign debt and senior debt in Irish banks were not forced to accept a 'haircut.' Instead, Irish taxpayers will indirectly pay back the €85 billion borrowed from the EU-IMF for many years to come. Analysts say this move was partially designed to prevent further instability in the European banking sector, with many firms considerably exposed to the Irish market.

Ahead of an EU summit opening today (28 October), Liberal group leader Guy Verhofstadt warned that the European Parliament was determined to use its new powers under the Lisbon Treaty and would not let economic governance plans be "diluted" by Germany and France.

But Verhofstadt, who leads the Parliament's Liberal group, warned that such backroom deals were now over. The European Parliament, he said, would have full co-decision powers on legislative proposals that will come out later in the year to flesh out the EU's new economic governance. His warnings were echoed by other political groups in Parliament, including the centre-right European People's Party (EPP), which commands the largest number of seats in the Strasbourg assembly. Iñigo Mendez De Vigo, a Spanish MEP in charge of institutional issues at the EPP, said he welcomed the Task Force's proposals. But he added that "they should take into account that the European Parliament is now co-legislator and will play its full part in defining the reforms to come".  "I regret that the French-German proposal does not even mention the European Commission, which also has a say on this issue," De Vigo said, adding the Parliament should also be more involved. The Greens, the fourth largest group in Parliament, also backed the Liberals and the EPP, in a move which could herald a long battle with member states over the economic reform plans. The Parliament "will be a co-legislator on four of the six legislative proposals" on economic governance, said Belgian MEP Philippe Lamberts, saying his group was "in favour of a more ambitious and broader economic framework than the Commission and Council". Verhofstadt said he hoped this new battle would not take nine months, referring to the time it took to pass a recent package of financial supervision laws through the assembly.

In a statement, Verhofstadt detailed the three key areas where the Task Force had diluted the Commission's initial proposal and on which he said Parliament was ready to pick a fight. First, the Commission had proposed to impose sanctions on member countries with excessive deficits or severe imbalances at an earlier stage, without delay. By contrast, the Task Force argues that a political decision should be taken on the proposed sanctions, meaning that they could be blocked by a country capable of putting together a blocking minority. The result is that there will be no preventive procedure and therefore no sanctions, the liberal group leader warned. Second, the Task Force foresees a "double filter" for decision-making, involving a political recommendation by the Council before the Commission can take action. In practice, this means the Commission will be allowed to take sanctions only after a certain period, Verhofstadt said. Finally, while the EU executive had proposed that corrective action or sanctions be initiated directly by its own services, the Task Force called instead for a recommendation that would need subsequent backing by the bloc's 27 finance ministers. "It's easy to change a recommendation, and far more difficult to change a proposal by the Commission, because in that case you need unanimity," Verhofstadt explained.

New proposals on joint economic governance put forward by European Commission President Jose Manuel Barroso and EU Council chief Herman Van Rompuy on Monday (28 February) have failed to overcome resistance from some member states.

The Barroso-Van-Rompuy plan does contain a requirement that German-style 'debt brakes' be implemented across the eurozone, however. Resistance to this element comes from those who do not want to open the Pandora's Box of constitutional amendments this could entail. Opposition to the Franco-German pact also revolved around the proposal that countries that maintain inflation-indexed wage systems abandon this practice. Belgium and Luxembourg in particular were resistant.

As key figures on the left in Europe, including within the commission itself, have begun to issue their misgivings over the path of austerity chosen by the EU as a response to the crisis, the commission warned social democrats that throughout the crisis, they have also backed this process. Last week, Greece's EU commissioner, Maria Damanaki, publicly distanced herself from EU austerity, saying it is leading to "social degradation." Former commission president Jacques Delors, a French Socialist, has also called the commission's recent Annual Growth Survey, a first step in the EU's new system of oversight of and intervention in national budgets, as "The most reactionary document ever produced by the commission."

European leaders have given way to German demands for a change to the European treaties, but the procedure for the change and its size has been calculated explicitly to avoid the danger that it could provoke referendums in some EU states.

Viritually all EU member states had vehemently opposed any treaty change going into the summit, but in the end they were convinced by Germany's need for the change in order to avoid a legal clash with its Karlsruhe-based Constitutional Court. The leaders agreed to construct a permanent crisis mechanism to fill the void left when the existing but temporary €110 billion bail-out package for Greece and €440 billion fund set up for the eurozone as a whole expire in 2013. According to diplomats, it is currently unclear whether this new mechanism would involve participation of eurozone members alone or the full 27 EU member states, including those who do not use the euro. Germany is worried that any permanent structure could run afoul of treaty rules forbidding EU bail-outs of member states and be struck down by the country's strict Constitutional Court, thus opening the euro once again to an assault by markets as occurred in the spring. Caught between the need for a structural change and their fear of both the activism of Karlsruhe and the growing euroscepticism of citizens, the other leaders signed off on the move only so long as the change envisaged was "small, small, small - the smallest possible ... in order to ensure there is no possibility of referendums," in the words of a Danish diplomat speaking to EUobserver. The method EU leaders chose to achieve the change will be via what is called the "special revision procedure," introduced by the Lisbon Treaty, under which the treaty can be amended by the European Council alone, so long as there is unanimity and the changes do not extend the competences of the European Union.

Europe's centre-right leaders are gathering in Helsinki to prepare the political family's strategy ahead of two crucial summits on economic issues later this month. An overhaul of the bloc's emergency lending fund, fiscal discipline and measures to boost economic competitiveness are all high on the agenda of Friday (4 March) evening's meeting. Print Comment article "We are preparing for the eurozone summit on 11 March so we can agree on significant measures there to stabilise the euro and strengthen the competitiveness of the EU," German Chancellor Angela Merkel told journalists prior to the talks.

Berlin meanwhile is keen so see any changes to Europe's emergency lending fund accompanied by tough new fiscal laws and measures to boost the economic competitiveness of member states.

Europe's Socialist leaders have proposed a ‘growth pact' as an alternative to the ‘competitiveness pact' originally proposed by France and Germany as a solution to the bloc's economic woes. Greek Prime Minister George Papandreou, Austrian Chancellor Werner Faymann and most of the continent's social democratic leaders, many of whom currently sit on opposition benches in their parliaments, including French Socialist leader Martine Aubry and Germany's head of the SPD, Sigmar Gabriel, met at a summit in Athens to co-ordinate their strategy ahead of an EU summit where a ‘comprehensive response' to the eurozone crisis is to be finalised.

The centre-left leaders endorsed a plan that still backs austerity, but alongside it the introduction of a financial transactions tax that they say would deliver €250 billion a year to European coffers that could be invested in green technologies and infrastructure.

German finance minister Wolfgang Schaeuble has said his country is willing to discuss greater harmonisation of eurozone tax policy, adding that the next decade is likely to see Europe take significant steps towards closer political union. The remarks, made in Germany's mass-selling Bild am Sonntag newspaper on Sunday (12 December), come as EU leaders look set to agree a limited EU treaty change this week in order to set up a permanent crisis mechanism to provide financial support to struggling eurozone states.

Meeting in the German town of Freiburg on Friday, French President Nicolas Sarkozy and German Chancellor Angela Merkel also said eurozone leaders must draw a fundamental lesson from the ongoing debt crisis and take steps towards political integration, including the harmonisation of tax policies or labour law. These initiatives would foster greater convergence of eurozone economies and "show this is not just about currency issues but also about political co-operation, which has to be deepened," said Ms Merkel.

Germany has successfully won its demand for the permanent mechanism to include the private sector sharing in future bail-out costs, reports the BBC. Such a decision could significant raise the borrowing costs of 'peripheral' eurozone states, as investors demand extra yields to cover the costs of a potential debt restructuring under the new mechanism.

European Union leaders have come to a consensus that the bloc's treaty must be changed, although only in a limited fashion, in order to allow for the creation of a permanent bail-out fund for member states. "Today we took important decisions to strengthen the euro," European Council President Herman Van Rompuy told reporters at a press conference in the early morning hours of Friday (29 October).

Initially horrified at the Franco-German demand for a wholesale re-writing of the EU rulebook only a year after the Lisbon Treaty had been approved, the other EU leaders are now warming to the idea of a "limited" tweaking of the treaty in a way that they hope will avoid major political fall-out. "Heads of state and government agree on the need for member states to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole and invite the president of the European Council to undertake consultations with the members of the European Council on a limited treaty change required to that effect," the draft conclusions of a two-day summit in Brussels read.

"No country is opposed in principle to a moderate treaty change but they want to know what the political and legal consequences of this would be," said one source close to the discussions. Two moves have been tentatively agreed. EU Council President Herman Van Rompuy is to be tasked with exploring whether such a limited change can be done via a simplified revision procedure, in which EU leaders can make the change without having to call a full Intergovernmental Conference (IGC) - involving negotiations between the governments, consultations with the European Parliament and the participation of the European Commission, which could open a Pandora's Box of other new proposals. Mr Van Rompuy would also explore whether legally this can be done without the tweak having to be presented to national parliaments for approval, which would almost certainly grind down the process, or even further, whether such a move would provoke referendums in some countries, notably Ireland, which maintains a constitutional requirement that any shift in powers from Dublin to Brussels be approved in a vote by the people. He would report back to the European Council in December.

The centre and left of the European Parliament have robustly condemned the outcome of the European Council, complaining that the interest of the bloc as a whole has been sidelined in favour of national interests. It is common for the groups in the parliament to criticise the results of European summits, but the missives issued the afternoon following the meeting were abnormally trenchant.

The Party of European Socialists "condemned" the result, attacking the "conservative leaders" who hold a majority in the Council. "The Conservative leaders are fundamentally mistaken. Yet again they have failed to take control of the crisis," said Poul Nyrup Rasmussen, the former Danish prime minister and leader of the PES. "The reaction of the Markets illustrates this clearly." Mr Rasmussen pointed to the overnight downgrading of Irish bonds by the Moody's credit agency as signifying that the investors were unconvinced by the council's plan. He warned that the EU Council had put itself in "direct conflict" with the parliament over its refusal to countenance any move towards debt issuance at the EU level. "The German, British, Swedish and Dutch Governments formed a roadblock to progress on the eurobonds issue. So blatantly putting national interest before European recovery is short-termist and lacking in leadership," he said.

The European Parliament must be consulted on the treaty change, but it has no co-decision power under the 'simplified revision procedure' - the new method the EU leaders are using to deliver the limited treaty change while avoiding any national referendums. But, depending on the fine print of how the permanent bail-out fund is constructed, it may have approval powers. The EU prime ministers and presidents at the summit did not take any decisions on the details of the fund. According to a parliamentary legal expert, if the European Council itself develops the mechanism on an 'intergovernmental' basis, and the fund is similar to the existing €440 billion rescue mechanism, which involves a series of loan guarantees by member states, then the chamber will only be consulted, as with the treaty change. But if the EU is asked to develop and present a proposal, or if it involves any direct EU funds as well as national loan guarantees, then "this is part of the community method, and the parliament has co-decision powers". The Greens also said that the permanent crisis mechanism "will not be enough to get Europe out of the crisis."

The Irish government has unveiled a far-reaching austerity package with sweeping cuts and tax hikes in an effort to meet the tough conditions of an €85 billion EU-IMF bail-out plan, an architecture of adjustment that will radically alter the very structure of how the country is run.

It is a plan that will hit every citizen and sector of the Irish economy, but will hit working people, students and low-income earners the hardest, a move that has already provoked both a deep fury from many but also a bitter resignation amongst others. Key measures include a slashing of welfare benefits, a hiking and broadening of income taxes, a sharp increase in university fees, the imposition of property taxes and water charges.

Dublin appears to have won the day against pressure from other EU member states and the commission that it hike its ultra-low corporation tax of 12.5 percent, calling the rate "a cornerstone of our industrial policy". Acquiescing to an IMF demand that labour costs be slashed, pay for minimum wage earners will be reduced by a full 12 percent, higher than the 10 percent that had been predicted, from €8.65 an hour to €7.65.

The nightmare scenario of another referendum on a change to the EU treaty in the Netherlands, five years after the country rejected the bloc's proposed constitution, could return to haunt European leaders, with the hard-right Dutch Freedom Party (PVV) of Geert Wilders on Tuesday (2 November) announcing it is considering proposing just such a vote.

MP Louis Bontes of the anti-immigrant PVV, which is part of the governing coalition pact, said his faction in the parliament may push for a referendum if the penalties for countries in breach of new EU fiscal rules are not strict enough.

The left-wing Socialist Party, one of the leaders of the No campaign in 2005 against the EU constitution, claiming that the dud EU charter had favoured the interests of businesses over citizens, has already endorsed the idea that another referendum should be called. On Friday, MP Harry Van Bommel, the party's spokesman for EU affairs and the deputy chair of the parliament's standing committee on the same subject, said that if a treaty change is approved by the European Council, it will call for a referendum. "We are very happy to have the support of the PVV in our push for a referendum," he told EUobserver, "and that they are willing to look into the issue as well." Mr Van Bommel was keen to stress that his party's opposition to the treaty change was for different reasons to that of the PVV. "They are more concerned that we not pay out to poorer countries whereas we are more worried that the proposed changes limit a nation's policy space in the social arena," he explained.

Moody's cut Spain's debt rating yesterday (10 March), pushing the euro lower and deepening the sense of crisis in the 17-nation currency bloc on the eve of a crucial EU summit in Brussels.

A French presidential source said euro zone leaders would discuss Portugal's measures to cope with its financial problems at Friday's summit but they were not working on a rescue plan. EU sources said Portuguese Prime Minister Jose Socrates is under intense pressure from his peers and the European Central Bank to announce additional austerity measures and accelerate economic reforms. The sources said he would make a statement to the leaders at the start of a summit on Friday on his commitment to deeper reforms, including to the labour market