EU leaders have agreed a series of measures to ensure the stability of the eurozone and improve economic co-ordination and competitiveness.

At the end of the first day of a two-day summit in Brussels (24-25 March), the leaders agreed how to finance a permanent eurozone rescue fund, the European Stability Mechanism (ESM), adjusting a deal reached by eurozone finance ministers on Monday (21 March) to reflect German concerns.

The ESM will have €700bn in capital, of which it will be able to lend €500 billion. A total of €80bn will be paid into the fund. The rest of the fund’s €620bn is callable capital – capital that will be paid in if and when needed.

Under the deal reached tonight, eurozone countries will pay in the €80bn in capital over five years, starting in 2013, when the fund will be launched. The finance ministers had agreed a four-year build-up period.

German asked for an extra year in order to reduce the effect on its national budget.

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Mark Rutte, the Dutch prime minister, said the deal to extend the build-up of the permanent mechanism “would not endanger” the triple ‘A’ status of the ESM, which was crucial for the Netherlands and others, said Rutte.

Economic governance

The agreement on the ESM was part of a wider deal on measures to ensure the stability of the eurozone and improve economic co-ordination.

Fact File

European Stability Mechanism

•    Succeeds European Financial Stability Facility after June 2013

•    Will have effective lending capacity of €500 billion

•    Subscribed capital of €700bn

•    €80bn in paid-in capital provided by eurozone countries from July 2013 in five equal instalments

•    Committed callable capital and guarantees worth €620bn

•    between 2013 and 2017 member states agree to provide, if needed, appropriate instruments more quickly to maintain a 15% ration between paid-in capital and outstanding amount of ESM issuances

•    Contribution key based on European Central Bank capital key. Countries with a per capita gross domestic product of less than 75% of the EU average will have a temporary correction for 12 years after joining the euro (three quarters of the difference between gross national income and ECB capital shares)

•    ESM can buy the bonds of a member state experiencing severe financing problems on the primary market

•    Pricing: ESM funding cost plus a charge of 200 basis points (bps) on the entire loan and a surcharge of 100bps for loans for more than three years

•    Collective action clauses for private sector involvement

•    Preferred creditor status

Other measures included changes to the temporary rescue fund, the European Financial Stability Facility, so that it can lend €440bn. At present, it is able to lend only around €250bn, as it needs to maintain a capital reserve in order to secure a triple-A credit rating.

Herman Van Rompuy, the European Council president who chaired the meeting of EU leaders in Brussels, said the changes to the EFSF would be made by June. This will provide time for the Finnish parliament to agree the changes after the country’s general elections, which will be held on 17 April.

The leaders also agreed a pact to strengthen economic co-ordination in the eurozone. Under the pact, all eurozone countries agree to ensure wage developments follow productivity, to ensure that public pension schemes are sustainable and to co-ordinate tax policy. Van Rompuy said that the pact would lead to a “new quality of economic co-ordination” in the eurozone.

He said that six EU countries that are not yet members of the eurozone – Denmark, Poland, Latvia, Lithuania, Bulgaria and Romania – would join the pact.

Leaders also agreed to closer economic surveillance and tougher rules to ensure that countries keep their debts and deficits under control.

José Manuel Barroso, the European Commission president, said the agreement today meant that “economic and monetary union will finally walk on its own two legs rather than limping along”.

Loans to Ireland

Van Rompuy said that leaders had not discussed a request from the Irish government to lower the interest rate it pays on its €67.5bn bail-out. He said that there would be discussion of Ireland’s package once the results of new stress-tests on Irish banks are known.

The results are due at the end of this week and are expected to show that Ireland’s banks need extra capital. Ireland is then likely to seek more capital from the EU, in the form of loans from the EFSF.

The summit meeting will continue on Friday, when leaders will discuss the situation in Japan and the implications of the accident at the Fukushima nuclear plant for safety.