EU leaders boost bailout fund, tighten EU fiscal governance

Eurozone leaders gave in to fresh demands from Brussels and Germany on Sunday to sign up to a competitiveness pact that will prompt countries to further coordinate their economic policies, as a quid pro quo for increasing German-backed bailouts to rescue debt-laden countries.

After marathon talks on the Libya crisis, the leaders committed to a watered-down set of demands to appease German angst over bailouts and clear the way for an agreement to increase the EU's rescue facility to €440bn from its current level of around €250 billion.

The Franco-German pact spells out demands that guarantee greater economic and fiscal policy coordination. The demands in the pact range from lowering wages to match productivity levels to lowering taxes on labour, linking pensions to life expectancy and greater tax policy coordination.

The 17 eurozone countries will also be expected to implement agreed reforms outlined in the pact by no later than the release of their national reform programmes (NRPs), due out in April.

EU leaders also agreed to increase the guarantees they provide to the bailout fund to allow it to raise capital on international markets.

This represents a bid to ensure that the fund is capable of bailing out any eurozone states that require assistance. Portugal seen as the country next most likely to need financial help, and many speculate that Spain may follow after that.

Leaders also agreed to lower the interest rate and lengthen the maturity on loans extended to Greece, giving Athens more time to repay its debts. The leaders declined to permit the fund to finance bond buy-backs of debt-ridden states.

"This is an important message on the political pledge of the euro members to fight for the euro’s stability," German Chancellor Angela Merkel said in Brussels following the summit.

"Everyone had to make a contribution. I hope that this will also be a good message to the world in terms of the euro as a major currency," Merkel said.

However trade unions reacted badly to how the EU is interfering in how countries set wages, describing the approach as a "race to the bottom" that will only lead to less, not more, competitiveness.

"The Pact […] will force member states to enter into a competitive downward spiral of undercutting each others' wages and working conditions. This risks pushing the economy further towards deflation and depression," John Monks, general-secretary of EU trade union body ETUC said on Sunday.

MEPs have also loudly complained about the creeping inter-governmentalism undercutting the EU legislative process which involves all three bodies: the European Commission, the Parliament and representatives of member state