Meanwhile, the European Central Bank on Thursday slashed interest rates for the second month in a row, a dramatic attempt to keep the continent from sliding into recession.
As the summit drew closer, friction was building, with the Germans blasting an alternative proposal being floated by Herman van Rompuy, the head of the European Council of heads of state, and drafted with the input of smaller E.U. nations. The plan envisions a potentially larger bailout fund for nations in crisis and suggests a more tempered approach to fiscal discipline that could win approval faster and more easily.
European diplomats were warning that the summit could push beyond the Friday deadline in the quest for a workable deal, and a top official in Berlin said some European leaders still failed to grasp the “seriousness of the situation.”
It set the stage for what could be a tense summit in Brussels, where leaders were set to begin hashing out an agreement Thursday night. For Europe, a signed pact would begin to answer a pivotal question: Will the region pull closer together, repairing some of the fundamental flaws of the euro union, or risk the currency zone breaking apart? For the rest of the world, however, the summit is revolving around a far more basic question: This time, will European leaders finally get it right?
Thus far, every attempt by European leaders to address a debt crisis that started in Greece two years ago has failed, allowing the region’s turbulence to spread to the larger economies of Italy, Spain and even France. Although the pact being worked out could be the most ambitious attempt yet to address the continent’s troubles, the verdict is out on whether it will be enough.
The credit ratings agency Standard and Poor’s added one more reason for Europe to act decisively Thursday when it warned it may downgrade the AAA rating of the 27-nation European Union. The announcement of a so-called “creditwatch negative” follows a warning a few days ago to downgrade several eurozone countries, including Germany and France.
Europe’s crisis now is as much political as economic. It stems from a legacy of overspending and overborrowing, but in a region of vast financial means, it also reflects a lack of investor faith in the will of financially solid nations such as Germany to unite behind their troubled neighbors to shore up the currency union.
Acknowledging that Europe’s leaders have been slow to address the crisis, French President Nicolas Sarkozy conceded this week that the clock was running out. “We don’t have time,” he said. “We are conscious of the gravity of the situation.”