Now, with borrowing costs for Spain and Italy edging down from the danger zone and Greece still entangled in negotiations with its international bailout monitors, the big decisions have been put off. European leaders plan to begin discussing a common euro-zone budget and to talk more about a shared supervisor for European banks — the first step toward a banking union. But no major decisions are expected by the end of the two-day meeting.
European leaders are gambling that Italy’s and Spain’s borrowing costs will not spike again during the next several weeks. This time, though, the countries have some recourse: The European Central Bank has pledged to intervene to keep their borrowing costs at a sustainable level provided they are bound by a bailout program that includes strict oversight of sovereign budget decisions.
That has some European leaders crowing that they are close to containing their problems for good, if not fixing them completely.
“We are close, very close, to an end to the euro-zone crisis,” French President Francois Hollande said Wednesday in an interview in Paris with six European newspapers.
The mere possibility of help from the deep-pocketed ECB drove down Spanish borrowing rates after the decision was announced in early September. On Wednesday, 10-year Spanish bonds were trading at rates of about 5.6 percent, significantly lower than the 6 percent that many economists see as the danger-zone mark.
“Words from the ECB are very important words,” said Karel Lannoo, head of the Center for European Policy Studies, a Brussels think tank. But, he added, “the heat is off. And if there’s no heat, policymakers don’t do anything.”
Top European Union officials acknowledge that the calmer atmosphere may not be conducive to action.
“We want to rejuvenate . . . the sense of urgency,” a senior official said this week in Brussels, speaking to reporters under a ground rule of anonymity.
Impact on U.S. elections
The sense that Europe’s economy is in a holding pattern may take its problems out of contention as an election issue in the United States in the final weeks of campaigning there. So long as European leaders do nothing to shock markets, U.S. investors — as well as voters worried about their retirement plans and jobs — may stay focused on the domestic economy, analysts say.
But in Europe, deep divisions remain about how to proceed. Germany, Europe’s economic powerhouse, favors strict centralized oversight over individual euro-zone countries’ budgets and spending decisions. France has pushed for more generous measures for struggling countries but is not ready to cede significant budget sovereignty to European oversight.
In his Wednesday interview, Hollande called for the speedy implementation of a banking union and broad powers for Europe’s permanent bailout fund to help ailing banks. Germany has pushed for slower timing on the banking union and has opposed using bailout money to directly recapitalize banks.
European Council President Herman Van Rompuy, seeking common ground, announced plans to address those topics at this week’s summit, but his goals are vague, analysts and officials say. Van Rompuy suggested that countries sign contracts committing themselves to borrowing and spending guidelines — but even that does not significantly differ from previous agreements that have been reached but not strictly enforced.
“There is a general feeling in the German government that Van Rompuy’s proposals are lacking a bit of ambition,” a European diplomat said Wednesday, speaking on the condition of anonymity to candidly discuss internal government assessments.
German Finance Minister Wolfgang Schaeuble this week called for major new powers enabling an E.U. commissioner to veto portions of individual countries’ budgets should they be violate euro-zone rules. He also called for more power to be given to democratically elected E.U. representatives in Brussels. But few officials expect his proposals to be taken up this time around.
In fact, few practical changes have been undertaken in Europe since the feverish days this summer when the currency union appeared in far graver danger.
German Chancellor Angela Merkel now appears to favor giving Greece more time to work on its towering economic problems, rather than pulling the plug on its bailout and forcing it into bankruptcy next month. But the International Monetary Fund is still locked in contentious negotiations with the Greek government about its progress, and no final decisions have been made.
The ECB hasn’t actually intervened to bring down Spain’s borrowing costs, because Spanish Prime Minister Mariano Rajoy hasn’t asked for a bailout, which was the precondition for help. His government now appears likely to take that step within weeks, according to Spanish press reports, but on that topic, too, the summit in Brussels is not expected to produce clarity.
Meanwhile, unemployment keeps rising in countries such as Greece, while economies grow anemically, or not at all, across Europe.
Even the proposed banking union, seen over the summer as a critical reform that needed to be up and running by the end of 2012, now seems pushed back into next year — without the financial backstops that many economists said were necessary to break the troubled relationship between government finances and bank balance sheets.
That leaves Europe exposed for now, said Guntram Wolff, the deputy director of Bruegel, a Brussels think tank.
“If you have a significant shock, you need significant resources to be able to provide guarantees that are very substantial,” he said. Still, he said, major work was underway.
“What we are doing here is not peanuts,” he said.