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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.

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.

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."

The EU's economic convergence plans are forcing Denmark to reconsider its euro opt-out, with a referendum on "modernising" Copenhagen's relation with Brussels possibly taking place by June. With plans for a "Competitiveness Pact" currently being drafted by EU institutions to replace a Franco-German draft on pensions harmonisation and constitutional "debt brakes", Denmark does not want to be left out of the decision-making process, due to not being in the single currency.

Dubbed the "Big Bang model", a referendum on all three opt-outs may be more successful than holding a referendum just on euro adoption, with 45 percent of Danes in favour of this move, according to a Megafon poll carried out in February. But the margin is still narrow, with 43 percent opposing it and 12 percent undecided. A strong advocate for Denmark's euro-accession is Belgian Liberal MEP Guy Verhofstadt, who points to the fact that the country's economy is already fully integrated into the eurozone and that the Danish krone is pegged to the euro. In addition, he believes that there is a need for a small country like Denmark to counter-balance Germany and France who "dictated" the competitiveness pact being currently drafted for the 17 member-strong eurozone.

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.

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

The European Central Bank turned a blind eye to "irresponsible lending" by German, French, British and Belgian banks, the European Union's former ambassador to the United States, John Bruton has said. In a damning speech at the London School of Economics on Monday (7 March) evening, Mr Bruton, also a former Irish prime minister of the same conservative political stripe as the current leader-elect, Enda Kenny, has accused Frankfurt of failing to use its powers to rein in speculative bubbles in countries such as Ireland and Spain.

"From 2000 on, British, German, Belgian, French banks, and banks of other EU countries lent irresponsibly to the Irish banks in the hope that they too could profit from the then obtaining Irish construction bubble," he said. "They were supervised by their home central banks, and by the ECB ... who seemingly raised no objection to this lending."

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.

MEPs are awaiting next week's entry into force of the Lisbon Treaty with impatience as the new institutional rules give the EU assembly a say in an array of new areas, including the EU's money-eating farm policy and its long-term budget. While the new EU foreign policy chief and council president represents a shake-up for the external face of the bloc, the internal shake-up, placing further substantial co-legislative power into the hands of euro-parliamentarians, is widely seen as the more profound change.

Come 1 December, the parliament will gain a say on, amongst other areas, legal immigration, judicial co-operation in criminal matters, police co-operation, structural funds, services of general economic interest [euro-jargon for public services], structural funds, transport, personal data protection and intellectual property rights. The rise in legislative powers represents almost a doubling in power, with the instances where deputies will work on proposed laws on an equal footing with member states rising from around 40 to almost 90. Of these, the most important areas are seen as energy security, common commercial policy and farm policy, with the last policy area accounting - contentiously - for around 40 percent of the EU's budget.

Portuguese, Spanish and EU leaders, alarmed at the seemingly unquenchable vengeance of this marketplace leviathan, insisted that the two Iberian nations were very far from having to follow Ireland and Greece in asking for bail-outs.

EU economics chief Olli Rehn sought to buttress the the standing of Portugal insisting on the "very different" situation between Lisbon and Dublin, while the head of the eurozone, Luxemburgish Prime Minister Jean-Claude Juncker described the market vigilantism against Portugal and Spain as "not justified". Railing against the state of affairs, Mr Rehn told MEPs on Monday: "Any talk of deconstruction of the European project is irresponsible. All member states would have been in a much more difficult situation without the European Union and its political shield."

Against a background of growing fears that the eurozone's rescue fund would be insufficient should Spain or Belgium knock on its doors, the European Union's economy chief has called for a hike in the effective lending capacity of the EU's bail-out mechanism. "We need to review all options for the size and scope of our financial backstops - not only for the current ones but also for the permanent European stability mechanism too," EU economics and monetary affairs commissioner Olli Rehn wrote on Wednesday in an opinion piece in the Financial Times.

The commissioner issued the call after member-state representatives met in the European capital to discuss proposals to boost the fund ahead of a meeting of European finance ministers next week. Mr Rehn also issued a stark warning that for all the deficit-slashing austerity measures that European states have so far imposed, it is not enough. "There is insufficient ambition and a lack of urgency in implementation. That needs to change," he wrote.

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.

Ireland's Green Party, the junior partner in the country's governing coalition with centre-right Fianna Fail, has announced it is to pull the plug on the alliance, calling on the government to announce elections in January.

However, despite misgivings, most party members were won to the side of sticking with the coalition by the party leadership's argument that it would be better to stay in and deliver on some of the party's policy hopes than be outside. In a vote over backing an agreement for government with Fianna Fail, 85 percent of members endorsed the party leadership's strategy. The leading opposition parties, the centre-right Fine Gael and centre-left Labour - on track to form a coalition after any election - offer a virtually identical response to the crisis to the government. On Monday afternoon, Fine Gael leader Enda Kenny made a fresh call for immediate elections.