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Germany to set out crisis resolution plan

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Germany intends to present plans next month for a permanent “crisis resolution mechanism” for the eurozone, to lay down rules for emergency funds for member states facing debt rescheduling.

The proposal would almost certainly require changes to the European Union’s Lisbon treaty and is therefore likely to be strongly opposed by several member states, including the UK, which is not a euro member. Others object that such a permanent insolvency mechanism would create a new level of “moral hazard” for sovereign borrowers and lenders in the eurozone, by providing a form of safety net to prevent outright default.

The German government insists, however, that only with a permanent mechanism can private lenders be forced to participate in paying for the consequences of a future financial crisis, such as the Greek debt crisis. The thinking in Berlin is that it would reduce the current level of moral hazard by involving private lenders, ensuring that they would receive some form of “haircut” in the event of a sovereign rescheduling. Officials say it should encourage wider spreads on government bonds within the eurozone, but the proposal would only affect new government borrowing entered into after the mechanism is formally approved.

The new mechanism would replace the €440bn ($611bn) European Financial Stability Facility that was set up in June as an emergency measure after the rescue plan that was agreed for Greece. The EFSF is only supposed to last for three years, until June 2013, and Germany, the largest guarantor, is adamant that it cannot and will not be extended. It is due to expire three months before a German general election.

The plans both for further tough sanctions against fiscal “sinners” in the eurozone and the permanent crisis resolution mechanism will be put forward in a second phase of negotiations in the taskforce chaired by Herman Van Rompuy, president of the European Council. Germany is hoping for agreement by summer next year, which would mean treaty changes could be attached to the accession treaty for Croatia.

“There are people who say we need no such permanent mechanism. But we must be prepared,” according to a senior German government official. “The EFSF will be finished in three years. We cannot go back to the status quo ante.”

He said that Germany would make its proposals “at the beginning of the second phase of the Van Rompuy taskforce” in November.

EU leaders are expected to approve a first phase of measures that do not require treaty change, including closer budgetary supervision, and quasi-automatic penalties for excessive government borrowing, at their October summit.

The package has been welcomed as a first step in Berlin, but officials say the need for a second phase is “unquestioned”.

The German government is pushing for tougher sanctions – such as suspending the voting rights of member states that persistently break their borrowing limits – that cannot be enacted without treaty change. The treaty states that the EU “shall not be liable for or assume the commitments” of the member states, in effect ruling out a permanent rescue mechanism backed by the full union without some form of amendment.

Germany’s proposal is likely to run up against high hurdles in Brussels. Several member states have expressed their opposition to any economic reforms that would require a change in the EU treaties – an arduous and politically risky effort that would run counter to prevailing public mood in several countries.

Britain, where the eurosceptic Conservatives and their pro-EU Liberal Democrat coalition partners have attempted to sideline European issues to keep the peace, is believed to be among the countries arguing most ardently against any treaty change.

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