European leaders head for financial summit with no solution in sight
By Howard Schneider and Michael Birnbaum,
ATHENS — German Chancellor Angela Merkel told her parliament ahead of a key vote on Wednesday that deep changes must be made to Europe’s economy if the euro is to hold together as currency. But she offered few concrete details about the steps she will take to protect it.
The lingering uncertainty underlines the likelihood that a major summit planned in Brussels later on Wednesday will fall short of achieving the comprehensive plan that Merkel and French President Nicolas Sarkozy had promised earlier this month.
“We need to act together jointly,” Merkel said Wednesday. “It’s not possible to have a simple solution. We will have to deal with this situation for years. . .We have a historical obligation to fulfill.”
But underlining how many issues remain unresolved, Merkel said that she would not commit any more Germany money to supporting Europe. She called for private investors to make a “large contribution” to ease Greece’s debts.
After Merkel spoke, the parliament gave her a strong endorsement for negotiations in Brussels, voting 503-89--with four abstentions--in favor of her outline about how to increase the power of the bailout fund.
European leaders have been frustrated in their efforts to craft a response to the continent’s debt crisis by Wednesday’s self-imposed deadline. In Italy, meanwhile, a political stalemate in Italy over austerity measures has further diminished hopes for a quick resolution.
As top European officials convene in Brussels for their second summit this week on the crisis, they are sending conflicting signals about how much progress they have made on key elements of a rescue plan.
Still unsettled on Tuesday were how best to use the limited resources of a European bailout fund to help cash-strapped governments such as Greece and Italy, and how much of a loss private investors such as banks should take on their holdings of Greek bonds, which have lost much of their market value.
Adding to the uncertainty, finance ministers from euro-zone countries canceled a meeting without public explanation, deferring critical decisions to the summit of government chiefs.
U.S. Treasury Secretary Timothy F. Geithner said Tuesday that only clear, detailed steps would help convince global investors that Europe can contain its problems, which are rooted in high levels of government borrowing and have threatened to undermine the region’s banking system. The debt crisis is taking a toll on Europe’s economy and could trip up the recovery in the United States.
After days of intense deliberation and high-level meetings, European leaders have agreed on the broad outlines of a plan but may be weeks from filling in the specifics.
“We want to see, like the world wants to see . . . the details, not just the objectives,” Geithner said as he visited a factory in North Carolina.
Geithner has joined senior officials from China and other economic powers in pressuring the 17-nation euro currency region for a more forceful plan to shore up its banks, a financing plan for embattled Greece, and a guarantee that the governments of large countries such as Italy and Spain will be able to borrow money at affordable rates. If their borrowing costs jump, these countries may face default, and Europe would be hard-pressed to come up with enough money to bail them out.
European leaders have promised a convincing plan. But tangled politics within European countries and bickering among the nations have put such a plan in jeopardy. And the recent debate has underscored tensions between European economic powers such as Britain that don’t use the euro and the 17-nation currency bloc.
In Italy, Prime Minister Silvio Berlusconi averted an immediate government crisis hours before the summit with an overnight deal with a major party on emergency growth measures demanded by the European Union.
Berlusconi and Northern League leader Umberto Bossi reached a compromise on raising Italy’s pension age in late-night talks Tuesday, the Associated Press reported. Berlusconi will deliver a letter with Italy’s measures to the summit later Wednesday.
In Greece, negotiations with private investors over possible losses on their Greek bond holdings were underway — a sticking point that must be resolved before euro-zone leaders can develop a long-term financing plan for the nation.
In a televised address, Prime Minister George Papandreou said he hoped the crisis triggered by overspending in his nation would reach a turning point Wednesday. European officials are requesting that private bondholders take losses as high as 60 percent, arguing that Greece will never stabilize its economy without steep concessions from creditors.
“Tomorrow we want to be able to turn the page, so that we, as Europe and as a country, can move forward,” Papandreou said.
Evidence of an economic slowdown across the continent has complicated the debate as officials try to balance conflicting priorities. High levels of government debt demand budget cuts, but that can damage economic growth. Greece needs debt relief, but that could hurt banks that are already clamping down on lending.
Meanwhile, measures to increase the power of a regional bailout fund have lacked details. A document describing the measures from the euro-zone working group was submitted to the German Parliament for review this week, and it hints at how far European leaders must go before they can adopt rules to reassure investors that the region’s banks and governments are not about to fail.
The intent is to use the European Financial Stability Facility to insure the bonds of countries such as Spain and Italy, and to raise money from outside investors to funnel into bond purchases. But the document gave no estimate of the value of the bonds that might be insured, of how much outside money might be raised or of how effective the strategy would be in increasing the size of the $600 billion bailout fund. On its own, the fund is considered inadequate for backstopping the euro zone’s governments and financial system.
The impact of the insurance and outside investment scheme will become clear “after extensive dialogue with potential investors,” the document says.
With the euro zone under pressure from major nations such as the United States and China to take more forceful action on the debt crisis, analysts said it appeared unlikely that significant problems will be solved at Wednesday’s meeting.
“Even the most optimistic outcome, given the current scope of discussions, will not deliver a ‘big bang,’ ” said Sony Kapoor, managing director of Re-Define, a Brussels-based think tank. “The time frames will be longer; the numbers, if any, smaller; and details less fleshed out than the markets would like.”
Along with a financing plan for Greece and new measures for the bailout fund, European officials plan to order banks to begin raising about $140 billion in additional capital to absorb losses on bonds issued by Greece and maybe other troubled European governments.
Birnbaum reported from Berlin.