BRUSSELS, March 23 (Reuters) – European Union leaders are set to delay a decision on how to strengthen their multi-billion euro rescue fund beyond a summit this week, undermining market confidence and possibly prolonging the region’s debt crisis.

For months, EU leaders have talked about using the summit, which will take place in Brussels on Thursday and Friday, to reach a final agreement on a “comprehensive package” of measures that would prevent the crisis from spreading further.

But draft conclusions prepared by euro zone officials for the summit, seen by Reuters on Wednesday, make clear that definitive decisions on the fund, the European Financial Stability Facility, will now only be taken by the end of June.

In the draft documents, leaders say they will tackle the issue of how to increase the capacity of the EFSF only when they formalise the structure of the European Stability Mechanism, a permanent fund that will replace the EFSF in 2013.

“The preparation of the ESM treaty and the amendments of the EFSF agreement, to ensure its 440 billion euro effective lending capacity, will be finalised so as to allow national procedures to be completed in good time for signature of both agreements at the same time before the end of June 2011,” the documents say.

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For a package of graphics on the crisis, please double click: r.reuters.com/hyb65p

BRUSSELS/BERLIN (Reuters) – Germany has publicly split with France and Britain over military action in Libya, a stance that highlights foreign policy divisions in the European Union and could have wider policy ramifications.

Germany was one of five countries that abstained in the United Nations Security Council vote Thursday that authorised force against Libya. The other four were the fast-rising “BRIC” nations — Brazil, Russia, India and China.

Berlin had repeatedly made clear its opposition to military involvement, saying it was not convinced a no-fly zone or eventual air strikes would be effective in bringing down Libyan leader Muammar Gaddafi or protecting Libyan civilians.

In that regard its decision to abstain, breaking ranks with the European Union’s two diplomatic heavyweights France and Britain, was not a surprise. But it creates a clear separation among the EU’s major powers at a time when the bloc is trying to forge a more united foreign and security policy.

And it risks reinforcing an impression among some EU states that Germany goes it alone when it suits its domestic interests, while demanding other countries override domestic concerns when Berlin needs them to support EU goals, such as on the economy.

Berlin’s caution is largely driven by domestic political considerations, said Nick Witney, senior fellow at the European Council on Foreign Relations and a former director-general of security policy at Britain’s ministry of defence.

Many German voters are already fed up with involvement in Afghanistan, and Chancellor Angela Merkel wants to keep voters on side. Her party faces six regional elections this year, including possible defeat in a vote in the Baden-Wuerttenberg region on March 27, having already lost a vote in Hamburg.

BRUSSELS (Reuters) – Portugal announced new spending cuts on Friday to try to restore confidence in its finances before a euro zone summit expected to boost economic coordination but defer steps to strengthen a rescue fund.

The euro , which suffered its biggest one-day fall against the dollar in a month on Thursday, hovered near a one-week low and the yields on Greek, Portuguese and Spanish bonds remained elevated amid growing doubts that leaders can bridge differences on how to solve the region’s fiscal woes.

The slow pace of European crisis management has heaped pressure on Portugal to seek an EU/IMF bailout, as Greece and Ireland were forced to do last year. But Prime Minister Jose Socrates has resisted saying it would be a national humiliation.

In a last-ditch attempt to convince investors its finances are sustainable, the government announced new cuts worth 0.8 percent of gross domestic product this year and structural reforms that it said would push its deficit down faster.

The measures include cuts in spending on social welfare and infrastructure. Changes to labour market rules are also planned, including a reduction in layoff payments.

“As an additional precaution for 2011, the consolidation measures will be strengthened,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon.

Germany has doused market expectations of a breakthrough on the rescue fund at Friday’s summit of the 17-nation currency area, saying the most that should be expected is an agreement on a “competitiveness pact” it put forward with France last month.

BRUSSELS (Reuters) – Euro zone leaders are set to agree a “competitiveness pact” at a summit on Friday and will push Portugal to announce new reforms to increase market confidence as they seek to draw a line under the regions’ debt crisis.

Germany has lowered expectations for a major breakthrough at the summit, saying the best that can be hoped for is an agreement on competitiveness.

Bigger decisions to tackle the crisis — such as whether to strengthen the euro zone bailout fund — will be handled at a summit later this month.

Ahead of Friday’s meeting, the euro rose 0.2 percent in Asia trading to $1.3817 after suffering its biggest one-day fall against the dollar in a month on Thursday on concerns about the euro zone’s debt problems.

China offered its support to the region after ratings downgrades this week of Greece and Spain underlined fears of possible sovereign debt defaults.

“China has confidence in the euro zone,” China’s central bank governor, Zhou Xiaochuan, told a news conference in Beijing. “Although some euro zone nations have hardships, we will vigorously support them in surmounting their present fiscal difficulties and improving their economies.”

Germany’s aim on Friday is to get the 17 euro zone states to enshrine EU rules on deficits and debt in national law — effectively making it illegal for any euro zone member to exceed fixed deficit and debt limits in the future.

BRUSSELS (Reuters) – Euro zone leaders are set to agree a “competitiveness pact” at a summit on Friday and will push Portugal to announce new reforms to increase market confidence as they seek to draw a line under the debt crisis.

Germany has lowered expectations for a major breakthrough at the summit, saying the best that can be hoped for is an agreement on competitiveness.

Bigger decisions to tackle the crisis — such as whether to strengthen the euro zone bailout fund — will be handled at an end-March summit.

Instead, Germany’s aim on Friday is to get the 17 euro zone states to enshrine EU rules on deficits and debt in national law — effectively making it illegal for any euro zone member to exceed fixed deficit and debt limits in the future.

The EU’s Stability and Growth Pact sets a government deficit limit of 3 percent of GDP and debt of 60 percent of GDP. Translating that into national laws would entail the adoption of a “debt brake,” similar to what German law requires.

“Euro area member states commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation,” the latest draft of the agreement euro zone leaders’ are expected to sign up to on Friday reads.

“Member states will retain the choice of the specific national legal vehicle to be used, but will make sure that it has a sufficiently strong binding and durable nature (e.g. constitution or framework law),” the draft said.

BRUSSELS (Reuters) – If the Arab League decides the movement fighting to overthrow Muammar Gaddafi is legitimate, the European Union may also recognize it, the EU’s foreign affairs chief said Thursday.

France became the first Western nation to give its full backing to the Libyan National Council Thursday, saying it now regarded it as the legitimate representative of Libya’s people, a move that adds pressure on Gaddafi to go.

But at a meeting of EU foreign ministers in Brussels, no other EU member state was willing to follow France’s lead. Britain said its policy was to recognize states, not groups within states, and Italy said the EU should act with one voice.

Ashton, who is in charge of forging a common foreign and security policy for the 27-nation EU, said France had every right to recognize the rebel movement, but said that she would rather wait to see if the Arab League recognizes it when it meets to discuss the situation in Cairo Saturday.

“My view is that we should decide our position as the 27 in conjunction with the Arab League and the importance of them giving us a lead from the Arab world on what’s happened,” she told reporters.

“If the Arab League said that this was the group of people that they thought would be the appropriate interlocutors that would help us to do decide what to do next… I do think the Arab League have a role to play in this for sure.”

The Arab League groups 22 Arab states, including Saudia Arabia, Syria, Yemen, Jordan, Iraq and Lebanon. Several of its members are headed by monarchs or have autocratic governments with little track record of acknowledging rebel movements.

BRUSSELS (Reuters) – NATO and the European Union begin two days of intensive talks on Libya on Thursday, with discussion focused on a possible “no-fly” zone and how Europe can support political transition across North Africa.

The Pentagon said on Wednesday it was preparing a “full range” of military options for Libya, including a no-fly zone, with the plans to be discussed by NATO defense ministers at a meeting in Brussels on Thursday.

Italy, whose bases could play a critical role in any military action, has said it will back any decisions taken by NATO, the EU or the United Nations, clearing the way for U.S. naval forces based in Naples to be deployed if needed.

“NATO is not looking to intervene in Libya, but we have asked our military to conduct prudent planning for all eventualities,” NATO Secretary-General Anders Fogh Rasmussen told Britain’s Sky News on Wednesday.

“If requested and if needed we can respond at very short notice. There are a lot of sensitivities in the region as regards what might be considered foreign military interference,” he said, adding any action must have a broad base of support.

Among the issues NATO’s 28 member states will consider is the legal basis for imposing a no-fly zone, especially if such a step needs to be taken without United Nations backing. No immediate decision on a no-fly zone is likely.

Winning U.N. Security Council approval is likely to be difficult, with both Russia and China expected to oppose it, although efforts are underway to draft a resolution.

BRUSSELS, March 8 (Reuters) – The European Union agreed on Tuesday to add the Libyan Investment Authority and several other financial organisations to its sanctions list, with the restrictions expected to come into force on Friday.

Diplomats said the EU’s 27 countries had agreed to impose sanctions on the $70 billion Libyan Investment Authority, the central bank, three other financial organisations and one individual, a former Libyan finance official. The list already covers 26 Libyans including Muammar Gaddafi and his family.

The details of the restrictions are expected to be published in the EU Official Journal — the record of all EU legislation – on Friday, when they legally come into force, diplomats said.

“The entities include the LIA and related financial institutions,” one EU diplomat said, adding the list would be finalised on Wednesday and would be “authorised” if no member state raised objections by Thursday at 1100 GMT.

The LIA was set up in 2006 with about $40 billion from Libya’s vast oil and gas income. It has expanded rapidly over the past five years with a range of investments in high-profile European assets, including banks and a defence company.

Many of its investments are in Italian companies, including the Juventus soccer team, of which the LIA owns around 7.5 percent. Italy was the colonial ruler of Libya from 1911 to 1943 and continues to have close business and trade ties.

The new sanctions would freeze LIA investments in all EU countries, and any other stakes that asset management firms oversee on behalf of the sovereign wealth fund. The LIA would not be able to receive dividends or sell any holdings.

BRUSSELS, March 8 (Reuters) – Euro zone leaders will take the next cautious steps in their year-long effort to quell the region’s debt crisis at a summit on Friday, but the meeting is unlikely to produce a breakthrough.

The top item on the agenda for the 17 heads of state and government is to agree a “competitiveness pact”, a deal Germany and France are pushing the rest of the euro zone to adopt to show their commitment to overhauling their economies.

The pact has been watered down since it was put forward by German Chancellor Angela Merkel and France’s Nicolas Sarkozy last month, and now looks likely to win approval from the rest of the euro zone leaders, many of whom were alarmed by the initial proposals.

The more stringent elements, such as a commitment to abandon inflation-linked wage increases, are likely to be dropped, but there should be agreement on measures to limit public deficits, gradually increase retirement ages to reflect demographics, and work towards a common corporate tax base. [ID:nLDE7201MC]

Any agreement is likely be hailed by EU leaders – particularly Germany and France — as a major step forward in the battle to stem the debt crisis, which has already led to bailouts for Greece and Ireland and still threatens Portugal.

But analysts regard competitiveness as a sideline issue that barely nudges the euro zone closer to tackling the fundamental problems underpinning the crisis — bad banking debts and heavily-indebted sovereign nations with poor growth prospects.

“The competitiveness pact as it stands is largely meaningless, it’s beside the point right now,” said Simon Tilford, chief economist of the Centre for European Reform, a London-based think tank.

BRUSSELS (Reuters) – Euro zone countries are working on what they call a “comprehensive package” of measures which they hope will resolve the region’s debt crises.

The aim is to finish the package by a European Union summit on March 24-25, when EU leaders may approve it. A preliminary summit on March 11 is expected to agree on part of the package: a “competitiveness pact” which Germany and France want euro zone members to adopt in order to strengthen their economies.

Below are some of the proposals that have been discussed for possible inclusion in the comprehensive package. Several are adamantly opposed by Germany or other member states, and therefore unlikely to make it into the final agreement.

INCREASING THE EFFECTIVE LENDING CAPACITY OF THE EFSF

There is a good chance of this step being adopted. The nominal lending capacity of the European Financial Stability Facility, the euro zone’s bailout fund, is 440 billion euros; but because of the need to retain its triple-A credit rating, which makes it cheaper for the fund to raise money on markets, it has an effective capacity of only about 250 billion.

The European Commission, France and to an extent Germany agree that the effective lending capacity should be boosted to the full 440 billion, but there is no agreement on how to do it.

HOW COULD THE EFSF’S CAPACITY BE INCREASED?