European leaders have slogged through about 20 summits since the debt crisis started two years ago. The next summit, on Wednesday, looms as the day that could break the euro zone if it, like the previous ones, proves to be a failure.
After a meeting in Brussels on Sunday, the leaders vowed to meet the self-imposed Wednesday deadline to unveil a giant financial package aimed to snuff out the debt crisis. But they gave little hint of a breakthrough as speculation of a stalemate between Germany and France, the euro zone’s paymasters, persisted.
Time is not on their side. Any suggestion that the leaders have come up short on crisis-fighting measures threatens to inflict severe pain on anxious stock and bond markets. Elsa Lignos, currency strategist in London for RBC Capital Markets, said the longer the crisis drags on, “the more damaging it becomes.”
French President Nicolas Sarkozy was more blunt. He was severely disappointed last week to learn that German Chancellor Angela Merkel would not be able to make a decision on the bailout fund by Sunday. “If we don’t reach a decision now, we’re dead,” he said at the time, according to a weekend report in Der Spiegel, Germany’s biggest newsmagazine.
Mr. Sarkozy continued to vent his frustration in Brussels on Sunday, this time singling out British Prime Minister David Cameron, who has been heaping pressure on France and Germany to fix the debt crisis before it hammers the already reeling British economy. “You have lost a good opportunity to shut up,” he told Mr. Cameron, according to several British reports. “We are sick of you criticizing us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.”
At a press conference on Sunday afternoon, European Council president Herman Van Rompuy played down the differences between Germany and France while providing no new information about whether, or how, the two countries plan to overcome their differences on the ideal size and function of the European bailout fund.
The fund, known as the European Financial Stability Facility, is touted as the prime weapon in the crisis-fighting arsenal. It now has access to €440-billion ($614-billion) in funds, but many economists and world leaders think it should come equipped with “shock and awe” firepower of perhaps €2-trillion ($2.8-trillion) to prevent the crisis from infecting the largest European countries and plunging the Western world back into recession.
“We are confident that we will get an agreement on Wednesday,” Mr. Van Rompuy said. “We are working in a spirit of compromise, in a spirit of having an ambitious package to reassure the rest of the world of our determination to safeguard the financial stability of the euro zone ... I saw a French President and a German Chancellor determined to work together.”
Mr. Van Rompuy confirmed that one of those countries – Italy – came under extreme pressure Sunday to clean up its financial act for fear that the euro zone’s third-largest economy would be too big to bail out if it, like Greece, were unable to roll over its debt.
He said that meetings were held with Italian Prime Minister Silvio Berlusconi, who has been accused of paying scant attention to the debt crisis until recently, when his government pushed through an austerity program that aims to eliminate the budget deficit by 2014. “Clearly we are calling for a major effort to be made by the Italian authorities and I believe that they are willing to do that,” Mr. Van Rompuy said.
Wednesday’s summit has no fewer than four ambitious goals. The first is to give the EFSF more firepower and flexibility. The second is to convince banks that own distressed Greek sovereign bonds to take a 50 per cent reduction, or “haircut,” on those holdings, up from the initial goal of a 21 per cent reduction, so that Greece’s crushing debt load can come down significantly.
The third is boosting the capital of the European banks that will suffer damage when they write down their sovereign debt holdings (this effort, including the total amount required – about €100-billion or $140-billion – has been largely agreed). Finally, the euro zone countries are to outline a tentative plan for fiscal integration, a process that could take many years.
Determining the size and the role of the EFSF has emerged as the potential deal buster. France favours using the European Central Bank to backstop the EFSF. Germany opposes the French proposal because it fears the ECB is being pulled too far away from its primary role as an inflation fighter. Instead, Germany has proposed that the EFSF be used to insure the potential losses of new bonds sold by debt-choked countries such as Italy and Spain.
Economists suspect that Germany, the euro zone’s biggest and wealthiest economy, will get its way even though the insurance model has obvious flaws. Gilles Moec, economist in London with Deutsche Bank, said using the EFSF as an insurer would create two-tier market – the insured debt and the “negatively impacted” uninsured debt.
At the end of the Sunday meetings, Jose Manuel Barroso, president of the European Commission, reiterated Mr. Van Rompuy’s earlier message that the crucial next meeting will not be a disappointment. “I’m sure that progress can be made by Wednesday.”