A day after a contentious summit of Europe’s leaders yielded no breakthroughs to foster growth, analysts said that without a flare-up of the crisis — an anti-bailout vote in Greece, or a bank run in Spain — French President Francois Hollande’s biggest proposals are probably headed nowhere.
Amid more signs that Europe’s economy is sputtering, supporters of dramatic steps to join together the euro zone’s financial system may yet get their wish, but only under the very circumstances they seek to avoid.
“At this juncture, it’s hard to see how the Germans could make big concessions,” said Simon Tilford, chief economist at the Center for European Reform in London. “What could potentially open up space for the Germans to make big changes would be a Greek departure” from the euro zone, which could come if anti-bailout politicians are elected June 17 and Europe holds firm against making concessions on the tough demands that are a condition of the $164 billion rescue package.
Merkel and Hollande agree that Europe needs more growth to get out of the slow-burning economic struggle that has dogged it for 21
2 years. But they disagree sharply on how best to achieve it, and the few compromises that emerged as likely winners from the summit this week are small, given the challenges these economies face. Jointly financed project bonds, for example, would give European backing to infrastructure projects but on a modest scale, which might take the edge off unemployment but would hardly restart economies.
Many economists say that if Greece left the euro zone, investors would expect bigger countries to go next, making it impossible for countries such as Spain and Italy to affordably refinance their debt and risking bank runs if depositors feared that their euros might turn into pesetas or lire.
Pressure for eurobonds
Although the euro-zone countries share a currency and a central bank, they lack tools such as commonly backed debt or unified deposit insurance that would marshal their collective strength to protect the weakest countries. Implementing those measures would give flexibility to struggling nations as they work to bolster their economies, advocates say.
Even some leaders who have been close to Merkel, such as Italian Prime Minister Mario Monti, have endorsed eurobonds, adding to pressure on her stance.
Eurobonds should be discussed “when the time is right, but not in too long,” Monti told reporters in Rome on Thursday, the Associated Press reported.
But such steps are unpopular among countries such as Germany, the Netherlands and Belgium, which say that without tighter rules on borrowing and spending the euro zone will quickly wind up overburdened with debt, this time backed by richer countries that have already taken tough medicine to improve their own economies. Merkel and her allies have pushed the same prescription — slashing spending, opening industrial sectors and the labor markets — for all the countries in the euro zone.
“It makes no sense to paper everything over now with eurobonds,” Merkel told reporters in Berlin on Thursday.
Push for growth measures
Merkel’s critics say the measures she is advocating are what Europe has been trying to do since the beginning of the crisis, with little success. Although there is little domestic support in Germany for eurobonds, opposition leaders there who have been emboldened by Hollande’s victory and their own successes in regional elections have pressed Merkel to do more for growth.
On Thursday, they met with Merkel to push her to add growth measures to the fiscal pact that Europe agreed to this year committing euro-zone countries to tight limits on debt and spending. They emerged claiming victory, although their announcement was short on specifics and the likely measures appeared modest.
When the euro zone has appeared to be on the brink of a precipice in recent years, Merkel has made major concessions. For months at the beginning of the debt crisis, she told Greece it would not be offered a bailout. Now it has received two. Europe has pumped hundreds of billions of dollars into a temporary and then a permanent bailout fund, which have now saved three countries — Greece, Portugal and Ireland — from bankruptcy.
So some compromise might be possible, analysts said.
“The single biggest impact on growth would come from slowing down the pace of public spending cuts,” said Sony Kapoor, the managing director of Re-Define, a think tank. “That would allow all sides to save face, claim victory, but would allow them to check some of the downward spiral right now.”
On Thursday, several business surveys were released showing manufacturing slowing across the continent, including in Germany. The International Monetary Fund and the Organization for Economic Cooperation and Development both warned this week that Europe could be on the brink of a crippling recession.