European leaders work on short-term fixes, road map to tackle economic woes
By Anthony Faiola,
BRUSSELS — European leaders here for a two-day summit labored into early Friday over a deal that could roll out short-term measures to help debt-strapped Italy and Spain and produce a loose road map for longer-term fixes to shore up the foundations of the euro currency union.
The summit — the 19th held in the region’s elusive attempt to resolve its economic woes — found the hard-line German Chancellor Angela Merkel seeking common ground with the worried leaders of southern European nations whose economies are teetering on the brink.
The Germans, who have argued for a long slog toward austerity and more European economic integration to address the crisis, appeared to open the door to a short-term plan that could tap Europe’s bailout fund to bring down soaring borrowing costs for Spain and Italy and bolster market confidence. As of early Friday, several proposals on how to do that were being weighed.
Leaders were also debating more radical steps toward European integration, including the establishment of a banking union and a European Treasury that could hold sway over national budgets. But the officials were not set to endorse timetables for rolling out the majority of these grand plans. They were working on an outline for more negotiations, given that many euro-zone nations — particularly Germany and France — have very different notions of how integration should take shape. Early Friday, French President Francois Hollande told reporters in Brussels that discussions on the longer-term fixes were postponed until October.
The leaders were, however, trying to flesh out at least one proposal — putting in place a regional supervisor for European banks, as well as a joint-deposit insurance program, by next year.
With the 21 / 2-year-old debt crisis escalating, euro-zone leaders are under pressure to come up with shorter-term solutions, and they endorsed in principle a program to pump about $150 billion worth of stimulus into the regional economy. While generally welcomed by analysts, the move is widely seen as unlikely to have a major effect on the crisis. Less than 10 percent of the $150 billion would be newly committed cash, with the majority coming from an existing pool of European Union structural funds that would be redirected to fostering youth employment and other job-creation programs.
The talks, however, appeared hard-going, with even the agreement on modest growth measures — largely mapped out days ago — dragging on for hours. Spain and Italy reportedly balked at approving the package unless it was paired with emergency relief for their economies. Herman Van Rompuy, president of the European Council, made up of the region’s heads of government, seemed optimistic that a broader deal would be reached by Friday. But, he said, “we haven’t yet finished our work.”
More importantly, the leaders were negotiating ways to tamp down Spanish and Italian borrowing costs. Under one option, Europe’s rescue fund would periodically buy up to 50 percent of the nations’ newly issued government debt. Under another, the fund would provide insurance to bond investors against possible losses.
“I have come here to get very rapid solutions to support countries in the greatest difficulty on the markets, even though they have made considerable efforts to restore their public finances,” Hollande said Thursday.
The plans appeared to be a step down from more aggressive new measures that the Italians and the Spanish were backing as of late Thursday. The Italians, for instance, were pushing a new plan that would hold down bond prices to targeted levels through bond-purchasing on open markets.
But leaders of northern European nations were quick to say they would not endorse wholly new measures.
“I’m not prepared to think up all kinds of new instruments,” Dutch Prime Minister Mark Rutte told reporters Thursday. “There are existing instruments, under strict conditions, which countries can use who can’t make it on their own.”
Although the bond-buying plans could be cheaper than offering nations such as Italy full bailouts, analysts said, the programs would need to be temporary and might not keep down borrowing costs for long. Some also questioned how long Europe could sustain such plans without dramatically boosting the firepower of its bailout funds — an anathema to Germany and other northern European countries.
Europe’s current and temporary $550 billion fund is almost half-empty after dolling out cash to Greece, Ireland and Portugal. Spain and Cyprus have made recent requests that could drain it further. Even after a permanent bailout fund is established, it would not be fully funded to its capacity of $625 billion until next year.
Such a plan could also sting Italian pride, given that the bond-backing programs would almost surely subject the euro zone’s third-largest economy to intrusive inspections by EU officials. On Thursday, at least, the Italians were able to lord over the Germans on at least one score — the 2 to 1 finish that saw Italy dispatch Germany to win a berth in the Euro 2012 soccer finals.
If leaders reach agreement on short-term aid, the collaboration could encourage optimism that Europe can halt the downward spiral of some of its hardest-hit nations. Many observers have held out only cautious hope for short-term crisis measures, as the Germans have been signaling for weeks that they would not take even marginal new action immediately.
That position began to change Thursday. A German official, briefing reporters in Berlin, said that existing but still unused options for tapping the bailout fund could be a route to easing Spain’s and Italy’s rising borrowing costs.
“There is a toolbox that stands available,” said the official, who spoke under ground rules of anonymity. “We have a wide range of tools. It is up to those who face particular challenges to define for themselves where and how they want to rely on these tools and what that means for them.”
Michael Birnbaum in Washington contributed to this report.
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