EU leaders prepare to take on bond markets

Eurozone governments prepare to deploy defence fund set up to aid debt-stricken countries.

The European Union’s leadership has embarked on a trial of strength with the bond markets in a bid to end uncertainty about the future of the European single currency.

The national governments of the eurozone member states are preparing to deploy a defence fund that was created in May to come to the aid of debt-stricken countries.

They have been urging Ireland, whose debt costs have risen on the bond markets and whose banks are being denied liquidity, to seek help from the fund. The EU leaders are hoping that, in using the fund, they can convince the bond markets that politicians have the firepower to defend the single currency.

Herman Van Rompuy, the president of the European Council, has warned that the EU is facing a “survival crisis” unless it protects the stability of the eurozone. “If we don’t survive with the eurozone, we will not survive with the European Union,” he told an audience in Brussels on Tuesday (16 November).

Later that same day the eurozone’s finance ministers met and agreed to send a team of officials from the European Commission, the European Central Bank (ECB) and the International Monetary Fund to Dublin today (18 November) to assess the economic situation and the state of the country’s banking sector.

The ECB has urged Ireland to ask for assistance so that Ireland’s banks do not rely so heavily on liquidity provided by the ECB.

In the past week, Ireland has come under increasing pressure from other governments to accept financial assistance and prevent a loss of confidence in other smaller eurozone countries’ ability to pay their debts. The Spanish and Portuguese governments have urged Ireland to take a quick decision to prevent uncertainty spreading.

Ireland initially resisted the pressure, saying that its austerity budget would bring results. “It’s not a question of wanting or not wanting [financial assistance]. It’s a question of identifying the problem in an urgent way and dealing with it,” Brian Lenihan, Ireland’s finance minister, said yesterday.

The government knows that Ireland would face tough conditions in return for financial assistance, including a major restructuring of its banking sector and pressure to increase taxes.

Olli Rehn, the European commissioner for economic and monetary affairs, said last month: “After what has happened, Ireland will not continue as a low-tax country, but, rather it will become a normal tax country in the European context.”

Other eurozone governments have been setting tough conditions on financial aid. Austria this week threatened to delay an instalment of aid to Greece because it has failed to meet a pledge to increase tax receipts. Finland this week demanded that Ireland should offer some form of collateral for any loan it received.

Yesterday José Manuel Barroso, the president of the European Commission, said: “I want to be absolutely clear – we are not putting pressure on Ireland to resort to the financial assistance mechanism. But I reiterate that the European Union mechanism is available and ready to be used if requested.”

Viktor Orbán, the prime minister of Hungary, who was visiting Barroso, said that Ireland should take a quick decision. “The later you decide to take a decisive step, the more expensive is the price of your crisis,” he said, adding: “If you have a problem you must act immediately.” Hungary received IMF and EU support in 2008.

The eurozone debt crisis will be debated in the European Parliament on Monday (22 November), when Jean-Claude Trichet, the president of the ECB, will appear before MEPs.