Eurozone leaders tackle debt, pressure grows on Portugal

Eurozone leaders began talks Friday on stepping up policy coordination to tame a debt crisis threatening to claim new victims as struggling Portugal took tough new measures to stabilise its finances.

The meeting comes against a troubled background as an escalating Libyan crisis roils the markets, making life even more difficult for the weaker eurozone states struggling to put their finances in order.

The problem was starkly highlighted when Portugal, widely tipped to be the next eurozone member to need a bailout after Greece and Ireland, adopted more austerity measures to ensure its public deficit meets EU norms by 2012.

Savage spending cuts have already proved unpopular and EU Economic and Monetary Affairs Commissioner Olli Rehn called Lisbon’s latest efforts “significant new commitments” to ensure stability in the Portuguese economy.

“I welcome and support this package of far-reaching and concrete measures,” he said, aimed at getting Portugal’s public deficit down to 4.6 percent this year and to 3.0 percent — the EU limit — in 2012.

Rehn said the new package was an important part of an overall solution to the eurozone debt crisis and should now be matched by commitments to bolster the bloc’s stability mechanisms.

Earlier, Greek Prime Minister George Papandreou called on his EU peers to take “strong European decisions to calm the markets” which take no heed of his country’s painful efforts to stabilise its economy.

Expectations, however, are for a general accord only, not specific measures.

“I think that today we should agree on the main lines of the Pact for the Euro,” Luxembourg Prime Minister Jean-Claude Juncker said, referring to a draft outline on ways to boost eurozone cooperation.

“We also ought to have some indication on how we can agree an overall package at the end of this month,” said Juncker, who also heads the shared currency Eurogroup of finance ministers.

The talks are supposed to lay the groundwork for the EU’s set-piece summit March 24-25, with European Commission head Jose Manuel Barroso saying they would be “an important step” towards a comprehensive answer to the debt crisis.

The 17 heads of state or government of the eurozone nations, plus the head of the European Central Bank Jean-Claude Trichet, began their talks at 1600 GMT to adopt the ‘Pact for the Euro’ designed to improve the bloc’s competitiveness.

The document, seen by AFP, sets out four areas for closer cooperation — competitiveness, employment, sustainable public finances and reinforcing financial stability.

Individual states will be responsible for specific measures — an important caveat for smaller members jealous of their independence — but they are all supposed to work towards these same goals.

The objective is “to achieve a new quality of economic policy coordination in the euro area, improve competitiveness, thereby leading to a higher degree of convergence,” the document states.

The logic is that if eurozone states have the same goals and obey the same rules, then the huge debt burdens and public deficits straining public finances and threatening the euro will ultimately be brought under control.

Germany, Europe’s powerhouse economy, insists that the euro’s current problems stem largely from member states not following the rules on limiting their debt and deficits.

Against this backdrop, eurozone leaders will also be looking at how they can bolster the debt rescue system set up after the Greek bailout in May.

The three-year European Financial Stability Facility is worth notionally 440 billion euros ($610 billion) but in practice, it can only provide half that amount. Making its full capacity available is still an issue.

Its 2013 replacement, the permanent European Stability Mechanism, will have double the firepower but there are difficult debates over its ultimate size and powers, especially whether it will be able to buy up eurozone government debt.