Leaders discuss greater budget discipline and recovery measures

BEIJING - European leaders sought on Monday to move away from the debt crisis and focus on much-needed growth as a new battle erupted over putting the eurozone's Achilles' heel, Greece, under European Union supervision.

If the EU does adopt stricter budget measures, basically German proposals for tougher budget discipline, that could bring stability. However, China should wait and see how these measures work before joining any bailout effort, Chinese economists said.

At the Brussels summit - the 17th in two years - the leaders are set to sign off on a permanent rescue fund for the eurozone and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.

Hoping to shield Italy and Spain, EU leaders will put the finishing touches to a rulebook for a permanent rescue fund, the European Stability Mechanism, a financial "firewall" worth 500 billion euros ($655 billion).

Several governments hope that the treaty on fiscal discipline, demanded by Berlin, will convince Germany to back an increase to the fund to bring it up to 750 billion euros.

The summit is expected to announce that up to 20 billion euros of unused funds from the EU's 2007-13 budget will be redirected toward job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

The summit is not immune from the problems Europe is facing. It is being held amid a general strike in Belgium over deepening austerity.

Sheep are deployed in the center of the Belgian city of Liege as a general strike, to protest against austerity measures, crippled the country on Monday during an EU summit in the capital, Brussels. Michel Krakowski / Agence France-Presse

With recession looming large over Europe, leaders will also try to find ways to jumpstart the economy and reduce an unemployment rate averaging 10 percent across the 17-nation eurozone.

Ideas include lowering the tax burden on employers to get more people hired, and giving youth guaranteed options in work, training or study.

The summit's success would be welcomed by China, said Zhang Jianping, a researcher at the Institute for International Economics Research under the National Development and Reform Commission.

The priority is not the size of the rescue fund but whether ailing eurozone countries, such as Greece and Spain, can adopt the required austerity policies, he said.

Countries that receive rescue funds must tighten their belts and present detailed budget plans, Zhang said.

A few days before the summit global rating agency Fitch downgraded five eurozone countries, including Italy and Spain, citing their vulnerability to sharp turns in market sentiment.

German Chancellor Angela Merkel will visit China and meet Premier Wen Jiabao in Beijing on Feb 2, the German government press office said in an e-mail statement.

Analysts said one purpose of Merkel's trip might be to look for help from China through the $3.2 trillion foreign exchange reserves.

Europe hopes that the BRICS (Brazil, Russia, India, China and South Africa) will invest in the rescue fund, but potential investors will be cautious, Zhang said.

Public anger over the austerity-first policy sweeping the eurozone was on full display in Belgium, where the strike halted the Eurostar, international rail lines, forced flight cancellations and brought public transport in Brussels to a standstill.

The proposed pact will apply to 26 countries inside and outside the eurozone, excluding Britain, and those that want to tap future funds will have to ratify the treaty on fiscal discipline to do so.

It could also prompt the European Central Bank to step up its purchase of bonds from governments paying higher risk premiums in commercial markets.

Weary of contributing to bailouts, Germany is pushing a plan for Athens to be placed under stewardship with the eurozone appointing an EU commissioner who could veto Greek budget decisions.

German Finance Minister Wolfgang Schaeuble warned that only radical reforms in Greece could unlock a second bailout of 130 million euros, negotiated in October.

"Unless Greece implements the necessary decisions and doesn't just announce them ... there's no amount of money that can solve the problem," he told the Wall Street Journal.

The German idea has angered Athens, with Greek Education Minister Anna Diamantopoulou calling it the "product of a sick imagination".

One EU diplomat said that the plan put forward by Berlin for Greece to cede budgetary sovereignty to Brussels was simple blackmail.

Greek Prime Minister Lucas Papademos, meanwhile, said on Sunday there was "total convergence" among his political allies on new austerity measures needed for a second bailout and on debt cuts to avert default.

With the country buried under a mountain of debt, Greece is seeking to wrap up a deal with private investors that have been asked to take a "haircut" worth about half the 200 billion euros owed to them.

Talks have been snagged on the amount of interest to be paid on the remainder, with Athens facing a critical bond reimbursement worth 14.5 billion euros on March 20.

Greek Finance Minister Angelos Venizelos told reporters on Saturday he was hopeful of a deal within days.

AFP and Reuters contributed to this story.