After much deliberation, the European Union leaders decided to set up a permanent fund to bail out any of the 16 members union in crisis situations.
The draft legislation has been agreed upon by the diplomats; however certain changes are required to be made in the Lisbon Treaty to enact the proposed stability mechanism.
Herman Van Rompuy, the President of the EU said member countries are determined to protect the currency. Greece and the Irish Republic have already received EU emergency funds to stabilize their economies.
The proposed fund – to be christened the ‘European Financial Stability Facility’ (EFSF) will come into existence in 2013 and will replace the temporary €750 billion (£637 billion; $1 trillion) bail-out fund.
“We stand ready to do whatever is required to ensure the financial stability of the Eurozone as a whole”, vowed Mr. Van Rompuy.
Terming it as “a big day for Europe”, Jose Manuel Barroso – the President of the European Commission said: “Our task now is to hold a course – walk, not talk – and prove those wrong who predicted the demise of our common currency”.
The common agreement lays out some tough pre-conditions, saying “member states whose currency is the euro may establish a stability mechanism, to be activated if indispensable to safeguard the stability of the euro as a whole”.
However, warning against any free lunch, the text says “The granting of any required financial assistance under the mechanism will be made subject to strict conditionality”. The conditions for accessing the emergency fund are controlling public debt and narrowing budget deficit.
EU officials say that two new sentences only need to be inserted in the Lisbon Treaty. Since Britain’s currency is the Pound, it need not contribute to the fund, Prime Minister David Cameron said.
Apparently the German Chancellor Mrs. Angela Merkel pushed for the new treaty to make bail-outs legal, but only as the last alternative.
The European Central Bank has already been buying sovereign bonds to support countries struggling with their finances and has announced to nearly double its reserve to €10.8 billions from the present €5.8 billions.
Analysts however point out that a key issue remains unresolved – whether investors who bought government bonds will be able to redeem their bonds without suffering much losses – or ‘accept a haircut’ as is known in financial parlance, between now and 2013.