- Associated Press - Thursday, June 28, 2012

BRUSSELS (AP) — Economic growth was the mantra among European leaders as they began a crucial summit on Thursday, though expectations of a breakthrough on the explosive issue of pooling government debt appeared to have fallen by the wayside.

Olli Rehn, European commissioner for economic affairs, said he expected leaders would agree on new growth measures, as well as on action to reduce borrowing rates for Spain and Italy, which are approaching unmanageable levels.

“I expect that there will be a decision on a further step toward rebuilding the economic and monetary union,” Mr. Rehn said shortly before the summit began. “We also need concrete decisions on a short-term stabilization of financial markets, especially sovereign debt markets.”

But German Chancellor Angela Merkel has rejected the most obvious way of reducing borrowing costs for the southern European countries: by issuing “eurobonds,” or debt backed by all countries. She reportedly has said it would not happen in her lifetime.

As the biggest economy in the eurozone, Germany would have to shoulder the brunt of the debt, and Mrs. Merkel has been reluctant to expose German taxpayers. She also is concerned it would ease the pressure on countries such as Greece and Spain to reform their economies.

“I think we should stop talking about eurobonds now because, with the German government’s ‘no,’ with this definitive ‘no’ from Mrs. Merkel, eurobonds are now a non-issue,” the president of the European Parliament, Martin Schulz, said Thursday.

While pressure on Mrs. Merkel has been building, she is not alone in her opposition to eurobonds. Austria, Finland and the Netherlands are also opposed, among eurozone countries.

Dutch Prime Minister Mark Rutte spoke forcefully Thursday against the idea.

“There are already instruments available in Europe for countries that say, ‘We can’t make it on our own’,” he said. “I see no reason whatsoever to start thinking up all kinds of new instruments.”

He said the only way for Spain and Italy out of this crisis is to keep cutting costs and reforming their economies, though he signaled that the Netherlands is willing to let them tap one of Europe’s bailout funds if they request aid.

Investors are looking for signs of a clear strategy to deal with the debt crisis. They are not hopeful, though, and sold off stocks across Europe on Thursday ahead of the summit.

“The good news is that this time around expectations are very low; the bad news is that the main players seem to be diametrically opposed when it comes to a strategy for ending the crisis,” said Gary Jenkins, managing director of Swordfish Research, a London-based consulting firm.

The French plan to stimulate growth, and thereby increase government tax revenues, is relatively modest. Although worth 130 billion euros ($162 billion), it is expected to consist mostly of European funds already earmarked for development.

Far more urgent is finding a way to keep the cost of borrowing money sustainable for weaker EU countries.

The leaders of Italy, France and Spain have been pressing Germany to agree to share debts before markets push the 17-nation eurozone closer to collapse. The EU’s top officials and the International Monetary Fund have argued the same.

Italian Prime Minister Mario Monti, at risk of losing his job because of voter frustration with budget cutbacks, said that Italians have made great sacrifices and gotten their country’s deficit under control but the yields on Italian debt have soared to one-year highs anyway.

Mr. Monti warned that if Italians become discouraged, they could turn against the idea of European integration, which the country so far has mostly embraced. That, he said, “would be a disaster for the whole of the European Union.”

Spanish Prime Minister Mariano Rajoy was sounding especially desperate.

“The most urgent issue is financing,” Mr. Rajoy said. “We can’t continue for a long time to finance ourselves with these prices; there are many institutions and financial entities that don’t have access to financial markets.”

Simon Tilford of the Center for Economic Reform noted there is a greater readiness among the the French, Italians and Spanish to act as one, without Germany. In the past, they were reluctant to isolate Mrs. Merkel.

“But that flexible approach … has delivered very little. They have grown alarmed and frustrated,” he said. “If anyone is to lead the charge, it may be Monti. He is the one who has the most credibility on the European stage.”

If Mrs. Merkel and Mr. Monti do end up on opposite sides at the negotiating table, it will be fitting: Germany and Italy are squaring off in the semifinal of the European football championship this evening.

There are no televisions, however, in the room where the leaders hold their meeting, which is chaired by European Council President Herman van Rompuy.

Even if the debate gets heated, it should remain civil. Each leader must raise a paperweight with his country’s name and flag when he or she wishes to speak.

While France has been the traditional counterweight to Germany in European dealings, President Francois Hollande has just seven weeks of governing under his belt and built his career as a consensus-builder. And his country’s economy is weaker, with growth forecast at just 0.4 percent this year.

Mr. Hollande was grinning broadly Wednesday night at the one concession he has been able to wring from Mrs. Merkel so far: an agreement to put growth on the European agenda alongside austerity measures.

Mrs. Merkel, standing stiffly at Mr. Hollande’s side ahead of bilateral talks in Paris, agreed to push for the 130-billion-euro ($162 billion) stimulus package that Mr. Hollande has vaunted, even though it is largely just a repackaging of existing EU funds.

Even if leaders of all 26 other EU nations line up against Mrs. Merkel, she cannot bend very far.

She needs the German Parliament to approve the eurozone’s permanent rescue fund, the European Stability Mechanism, and a European budget-discipline pact, both expected to happen Friday. And many measures floated as possible solutions could require changes to Germany’s constitution.

Amid calls for Greece or other Mediterranean states — and even Germany — to pull out of the euro, Mrs. Merkel argued Wednesday for greater unity.

“We need more Europe. Markets are waiting for that.”

Angela Charlton reported from Paris. Geir Moulson in Berlin and Toby Sterling in Brussels contributed to this report.

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