Failure would be likely to put pressure on Greece to abandon the euro, the common currency used by 17 of the European Union’s 27 members. That, in turn, could touch off a cascade of financial turmoil, experts warn, endangering the E.U. and eventually crossing the Atlantic to undermine hopes for economic recovery in the United States.
Fellow European governments, meanwhile, warn that they will not pay out the next $170 billion installment on a separate E.U. rescue package for Greece unless the government legislates and puts into practice a new round of promised austerity measures. The tough cutbacks have been stalled for several months in the face of resistance, not only from an already-squeezed population, but also from the legislators and bureaucrats who are supposed to enact and enforce them.
European leaders, seeking to restore confidence in skeptical financial markets, announced after an all-night summit in December that they would negotiate a treaty binding governments to limit the perennial budget deficits that are the root of the crisis. After weeks of mid-level negotiations, a proposed treaty has been prepared for presentation at another extraordinary summit, scheduled for Monday in Brussels, an E.U. spokesman said.
That is a record time for the European community, where such negotiations usually move at a snail’s pace. But economists and officials point out that, in the latest drafts, the new treaty changes little from previous anti-debt commitments that over the years were simply ignored by European governments in need of extra financing.
One recent draft, for instance, contained a clause allowing E.U. governments to run deficits above the agreed cap “in periods of economic downturn,” setting the stage for a repetition of what happened to earlier no-deficit agreements. The European Central Bank, smelling a return to old ways, warned against any provision that would allow “easy circumvention” of the new rules.
In addition, the proposed treaty, despite its promise of Europe-wide deficit caps, would take at least several years to bring down government debts. As a result, it would have little effect on the immediate financial crisis, in which Greece is looking for a swift rescue and Italy, Spain and other countries face the prospect of paying back large bond issues coming due over the next few months.