German leaders delivered a reality check on hopes for a quick fix to Europe's debt mess, saying the crisis will not end soon despite relentless pressure from the Group of 20 countries for a speedy resolution.
A permanent fix to the crisis "surely extends well into next year," a spokesman for German Chancellor Angela Merkel said Monday. In a similar comment, German Finance Minister Wolfgang Schauble said the European Union leaders meeting in Brussels this weekend will probably not be able to work magic. "We won't have a definitive solution" at the summit, he said.
Germany's statements threw cold water on a target set over the weekend by G20 officials to "decisively address the current challenges through a comprehensive plan" by next weekend. And the comments put the European markets in reverse on Monday after a positive start early in the morning and a strong rally last week. In London, the FTSE-100 index lost half a percentage point and the euro slipped against the dollar.
The setback suggests there are still some divisions among the biggest EU countries over matters ranging from the size of writedowns that banks should take on their holdings of distressed Greek debt to the ultimate size of the newly overhauled of the bailout fund, known as the European Financial Stability Facility (EFSF). The fund has €440-billion of guarantees from national governments, but could be leveraged up to €2-trillion or more to provide the "shock and awe" firepower needed to prevent the Greek debt crisis from taking down big economies such as Spain and Italy.
Germany's reality check came during a crucial week in the euro zone debt crisis, which began almost exactly two years ago, when Greece admitted that its size of its national debt and budget deficit had been underplayed for years. The admission sent Greek bond yields soaring to the point the country was unable to fund itself. It received a bailout in May 2010. Ireland and Portugal also accepted bailouts.
The Greek parliament on Thursday is to hold a vote to approve the latest round of austerity measures. "Though parliament is expected to vote yes to avoid default, public reaction is worsening, while some strikers have made it their aim to topple the current government," said Elsa Lignos, senior currency strategist in London for Royal Bank of Canada's investment arm. "There is a non-negligible chance this vote fails, which would throw up further hurdles to the grand plan."
The socialist government of prime minister George Papandreou has a mere four-seat majority in the 300-member parliament, meaning even a minor backbench revolt could topple his rule. To protest the government's increasingly severe austerity programs, Greece's main public- and private-sector umbrella unions have called a 48-hour general strike.
The cautious remarks from Ms. Merkel and Mr. Schauble do not necessarily mean the debt crisis talks have lost momentum. Details were scant from the G20 meeting, but Germany and France acknowledged that there was broad agreement on a scheme to recapitalize the banks and to give the EFSF more firepower.
A crisis-fighting plan is still supposed to be unveiled at the annual G20 leaders summit in Cannes, France, in early November. But if it too comes up short on detail, the markets could sell off.
Various governments have been heaping pressure on Germany and France, the strongest euro zone countries, to put an end to the debt crisis before it triggers a new European, and perhaps, global recession. On Monday, Canadian Finance Minister Jim Flaherty, speaking to a business audience in Dublin, criticized European leaders for moving to slowly.
"Quite frankly, Europe's response over the past year has been disappointing," he said. "This situation does not improve with time. This is not a fine wine."